Attached files
file | filename |
---|---|
EX-32 - CERTIFICATION - BPO Management Services, Inc. | bpo_10q-ex32.htm |
EX-31.2 - CERTIFICATION - BPO Management Services, Inc. | bpo_10q-ex3102.htm |
EX-31.1 - CERTIFICATION - BPO Management Services, Inc. | bpo_10q-ex3101.htm |
EX-10.1 - SHARE PURCHASE AGREEMENT - BPO Management Services, Inc. | bpo_10q-ex1001.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
ý QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended: September 30, 2009
o 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: 0-13591
BPO
MANAGEMENT SERVICES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Pennsylvania
|
|
23-2214195
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(IRS
Employer Identification No.)
|
1290
N. Hancock, Ste 200, Anaheim, CA
|
92807
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(714)
974-2670
|
(Registrant’s Telephone
Number, Including Area Code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 ý No o
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for shorter period that the registrant was required to submit and
post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” “and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No ý
The
number of shares outstanding of the registrant’s only class of common stock,
$0.10 par value, was 15,116,838 on November 12, 2009.
PART
I
|
||
FINANCIAL
INFORMATION
|
||
Page
|
||
Item
1. Financial Statements
|
3
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss for the three
and nine months ended September 30, 2009 and 2008
(Unaudited)
|
3
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
December 31, 2008
|
4
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008 (Unaudited)
|
5
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
7
|
|
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
18
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
27
|
|
Item
4T. Controls and Procedures
|
27
|
|
PART
II
|
||
OTHER
INFORMATION
|
||
Item
1. Legal Proceedings
|
28
|
|
Item
1-A Risk Factors
|
28
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
28
|
|
Item
3. Defaults Upon Senior Securities
|
28
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
28
|
|
Item
5. Other Information
|
28
|
|
Item
6. Exhibits
|
29
|
|
Signatures
|
30
|
|
Exhibits
Attached to this Quarterly Report on Form 10-Q
|
31
|
2
ITEM 1.
FINANCIAL STATEMENTS
BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
IT
outsourcing services
|
$ | 2,676,977 | $ | 3,377,155 | $ | 8,510,841 | $ | 9,827,698 | ||||||||
Healthcare
|
3,334,816 | - | 10,446,628 | - | ||||||||||||
Human
resource outsourcing servicing
|
86,139 | 366,157 | 614,978 | 1,338,992 | ||||||||||||
Total
revenues
|
6,097,932 | 3,743,312 | 19,572,447 | 11,166,690 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of services provided
|
4,511,790 | 1,938,998 | 14,007,957 | 5,213,168 | ||||||||||||
Selling,
general and administrative
|
1,955,387 | 2,037,938 | 6,780,035 | 6,210,920 | ||||||||||||
Research
and development
|
124,429 | 81,221 | 349,189 | 228,258 | ||||||||||||
Depreciation
and amortization
|
1,032,106 | 544,781 | 3,045,721 | 1,660,672 | ||||||||||||
Share-based
compensation
|
- | 207,091 | 18,333 | 621,275 | ||||||||||||
Restructuring
costs
|
- | - | 382,207 | - | ||||||||||||
Goodwill
and intangible asset impairment
|
2,356,452 | - | 2,356,452 | - | ||||||||||||
Total
operating expenses
|
9,980,164 | 4,810,029 | 26,939,894 | 13,934,293 | ||||||||||||
Loss
from operations
|
(3,882,232 | ) | (1,066,717 | ) | (7,367,447 | ) | (2,767,603 | ) | ||||||||
Interest
expense
|
||||||||||||||||
Related
parties
|
18,782 | 27,148 | 57,948 | 80,853 | ||||||||||||
Other,
net
|
110,816 | 12,953 | 346,840 | 54,029 | ||||||||||||
Total
interest expense
|
129,598 | 40,101 | 404,788 | 134,882 | ||||||||||||
Loss
before income taxes
|
(4,011,830 | ) | (1,106,818 | ) | (7,772,235 | ) | (2,902,485 | ) | ||||||||
Income
tax expense
|
- | 19,500 | 15,600 | 63,952 | ||||||||||||
Loss
from continuing operations
|
(4,011,830 | ) | (1,126,318 | ) | (7,787,835 | ) | (2,966,437 | ) | ||||||||
Discontinued
operations (Note 3):
|
||||||||||||||||
Loss
from sale of discontinued business
|
(203,854 | ) | (736,088 | ) | (2,942,175 | ) | (1,599,374 | ) | ||||||||
Net
loss
|
(4,215,684 | ) | (1,862,406 | ) | (10,730,010 | ) | (4,565,811 | ) | ||||||||
Foreign
currency translation gain (loss)
|
(110,658 | ) | (8,372 | ) | 349,677 | (188,566 | ) | |||||||||
Comprehensive
loss
|
$ | (4,326,342 | ) | $ | (1,870,778 | ) | $ | (10,380,333 | ) | $ | (4,754,377 | ) | ||||
Loss
per share - basic and diluted
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.27 | ) | $ | (0.09 | ) | $ | (0.51 | ) | $ | (0.24 | ) | ||||
Loss
from discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.19 | ) | (0.13 | ) | ||||||||
Net
loss per share - basic and diluted
|
$ | (0.28 | ) | $ | (0.15 | ) | $ | (0.70 | ) | $ | (0.37 | ) | ||||
Basic
and diluted weighted average common shares
outstanding
|
15,138,379 | 12,671,034 | 15,156,517 | 12,529,216 |
See
accompanying notes to condensed consolidated financial
statements.
2008
amounts have been reclassified to reflect discontinued operations. See Note
3
3
BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS OF
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(UNAUDITED)
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,004,790 | $ | 2,895,711 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $534,858 and
$505,338, respectively
|
3,933,364 | 5,408,156 | ||||||
Prepaid
expenses and other current assets
|
1,046,258 | 928,647 | ||||||
Current
assets held for sale
|
- | 2,290,630 | ||||||
Total
current assets
|
5,984,412 | 11,523,144 | ||||||
Equipment,
net
|
6,828,277 | 7,170,213 | ||||||
Goodwill
|
- | 2,282,064 | ||||||
Intangible
assets, net
|
3,633,328 | 4,192,955 | ||||||
Other
assets
|
614,513 | 1,244,641 | ||||||
Non-current
assets held for sale
|
- | 4,447,545 | ||||||
$ | 17,060,530 | $ | 30,860,562 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of lines of credit and long-term debt
|
$ | 3,050,345 | $ | 2,196,652 | ||||
Current
portion of capital lease obligations
|
487,343 | 394,765 | ||||||
Accounts
payable
|
5,737,822 | 4,687,333 | ||||||
Accrued
expenses
|
2,989,265 | 2,856,021 | ||||||
Restructuring
liability
|
316,711 | - | ||||||
Accrued
interest-related party
|
57,948 | - | ||||||
Accrued
dividend payable
|
1,369,331 | 1,369,331 | ||||||
Accrued
dividend payable-related party
|
651,281 | 651,281 | ||||||
Amount
due former shareholders of acquired companies
|
- | 1,000,000 | ||||||
Deferred
revenues
|
1,609,883 | 2,091,277 | ||||||
Related
party notes payable
|
830,246 | 930,246 | ||||||
Other
current liabilities
|
120,000 | 137,715 | ||||||
Current
liabilities associated with assets held for sale
|
- | 4,101,437 | ||||||
Total
current liabilities
|
17,220,175 | 20,416,058 | ||||||
Lines
of credit and long-term debt, net of current portion
|
- | 722,304 | ||||||
Capital
lease obligations, net of current portion
|
799,488 | 690,278 | ||||||
Other
long-term liabilities
|
1,110,440 | 742,520 | ||||||
Non-current
liabilities associated with assets held for sale
|
- | 5,694 | ||||||
Total
liabilities
|
19,130,103 | 22,576,854 | ||||||
Commitments
and contingencies (Note 9)
|
||||||||
Stockholders'
equity
|
||||||||
Convertible
preferred stock, Series B, par value $1.00; authorized 21,105,000
shares; 21,103,955 shares issued and outstanding
|
21,103,955 | 21,103,955 | ||||||
Common
stock, par value $0.10; authorized 1,900,000,000 shares;
15,138,379 shares issued and outstanding
|
1,513,838 | 1,516,559 | ||||||
Additional
paid-in capital
|
14,716,978 | 14,687,206 | ||||||
Accumulated
deficit
|
(39,436,739 | ) | (28,706,729 | ) | ||||
Accumulated
other comprehensive income (loss), foreign currency translation
adjustments
|
32,395 | (317,283 | ) | |||||
Total
stockholders' equity
|
(2,069,573 | ) | 8,283,708 | |||||
$ | 17,060,530 | $ | 30,860,562 |
See
accompanying notes to condensed consolidated financial statements.
2008
amounts have been reclassified to reflect assets and liabilities held for sale
of discontinued operations. See Note 3
4
BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (10,730,010 | ) | $ | (4,565,811 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Loss
from sale of discontinued operations
|
2,942,175 | 1,599,374 | ||||||
Depreciation
|
2,568,181 | 872,604 | ||||||
Amortization
of intangible assets
|
477,540 | 788,068 | ||||||
Increase
in the reserve for doubtful accounts
|
321,120 | - | ||||||
Non-cash
equity compensation expense
|
27,051 | 621,275 | ||||||
Goodwill
and intangible asset impairment
|
2,356,452 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
1,153,672 | (1,074,931 | ) | |||||
Prepaid
expenses and other current assets
|
247,425 | (316,499 | ) | |||||
Other
assets
|
265,092 | (404,744 | ) | |||||
Accounts
payable
|
1,050,489 | (481,800 | ) | |||||
Accrued
expenses
|
133,244 | 554,594 | ||||||
Restructuring
liability
|
316,711 | - | ||||||
Accrued
interest-related parties
|
57,948 | (27,306 | ) | |||||
Accrued
dividends-related parties
|
- | 897,556 | ||||||
Amount
due former shareholders of acquired companies
|
- | (215,944 | ) | |||||
Deferred
revenues
|
(481,394 | ) | 400,836 | |||||
Other
long-term liabilities
|
370,364 | - | ||||||
Net
cash provided by (used in) operating activities
|
1,076,060 | (1,352,728 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Purchase
of equipment and internally developed capitalized software,
net
|
(1,639,067 | ) | (659,895 | ) | ||||
Release
of restricted cash
|
- | 922,888 | ||||||
Net
cash provided by (used in) investing activities
|
(1,639,067 | ) | 262,993 | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from bank loans
|
111,230 | 491,292 | ||||||
Repayment
of notes issued to former shareholders of acquired
companies
|
(1,000,000 | ) | (885,827 | ) | ||||
Repayment
of capital lease obligations
|
(385,390 | ) | (161,036 | ) | ||||
Proceeds
from issuance of preferred stock, net of cash paid for commissions and
direct costs
|
- | 5,157,996 | ||||||
Dividends
accrued on preferred stock
|
- | (753,461 | ) | |||||
Repayment
of notes payable - related party
|
(100,000 | ) | (200,000 | ) | ||||
Net
cash provided by (used in) financing activities
|
(1,374,160 | ) | 3,648,964 | |||||
Net
cash used in discontinued operations
|
(711,131 | ) | (419,882 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
(cumulative)
|
757,377 | (72,212 | ) | |||||
Net
change in cash
|
(1,890,921 | ) | 2,067,135 | |||||
Cash
and cash equivalents, beginning of period
|
2,895,711 | 857,941 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,004,790 | $ | 2,925,076 |
See
accompanying notes to condensed consolidated financial
statements.
2008
amounts have been reclassified to reflect cash flows from discontinued
operations. See Note 3
5
BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 346,840 | $ | 300,050 | ||||
Income
taxes
|
$ | 15,600 | $ | 70,465 | ||||
Supplemental
disclosure of non-cash investing and financing
activities:
|
||||||||
Acquisition
of equipment under capital leases
|
$ | 587,178 | $ | 434,146 | ||||
Issuance
of Series F Preferred Stock
|
$ | - | $ | 8,949 |
See
accompanying notes to condensed consolidated financial statements.
2008
amounts have been reclassified to reflect cash flows from discontinued
operations. See Note 3
6
BPO
MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
1.
Organization and Basis of Presentation
Organization
BPO
Management Services, Inc. was incorporated in 1982 in the state of Pennsylvania
and was previously named Healthaxis, Inc. On December 30, 2008,
Healthaxis Inc. (as used in these Condensed Consolidated Financial Statements,
“Healthaxis”) acquired the publicly held BPO Management Services, Inc. (“Legacy
BPOMS”) in a reverse merger and immediately changed its name to BPO Management
Services, Inc., also referred to “BPOMS.” BPOMS is a provider of
business process outsourcing services providing information technology
outsourcing (“ITO”) services, Healthcare administrative systems and related
services and financial and accounting outsourcing (“Healthcare”) services and
human resource outsourcing (“HRO”) services to middle market
enterprises.
For
accounting purposes, the acquisition has been treated as a recapitalization of
Legacy BPOMS as the acquirer. The historical consolidated financial statements
prior to December 30, 2008, are those of the Legacy BPOMS. All share-related
data have been presented giving effect to the recapitalization resulting from
the reverse merger. References in these Condensed Consolidated
Financial Statements to the “Company” or “BPOMS” refer to BPOMS.
Basis of
Presentation
The
following unaudited condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the company believes that the disclosures made
are adequate to make the information not misleading. Operating results for
the three and nine month period ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2009. The interim condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and related footnotes included in our Annual Report on
Form 10-K for the year ended December 31, 2008. For 2008, amounts have been
reclassified to reflect discontinued operations on the condensed consolidated
statements of operations, condensed consolidated balance sheets, condensed
consolidated statements of cash flows and in the notes contained herein (see
Note 3).
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of BPOMS and
its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits among the consolidated entities have been
eliminated upon consolidation. Each of the following entities is included
in consolidation as of date of its inception or acquisition.
7
Company
|
Inception/Acquisition
Date
|
|
BPO
Management Services, Inc. (the "Company") or
("BPOMS")
|
Inception
date: July 26, 2005
|
|
Adapsys Document Management LP ("ADM") (2) | Acquired: July 29, 2005 | |
Adapsys LP ("ADP") (2) | Acquired: July 29, 2005 | |
Digica, Inc. ("Digica") (1) | Acquired: January 1, 2006 | |
Novus Imaging Solutions, Inc. ("Novus") (2) | Acquired: September 30, 2006 | |
NetGuru Systems, Inc. ("NGSI") | Acquired: December 15, 2006 | |
Research Engineers, GmbH ("GmbH") | Acquired: December 15, 2006 | |
DocuCom Imaging Solutions, Inc. ("DocuCom") (2) | Acquired: June 21, 2007 | |
Human Resource Micro-Systems, Inc. ("HRMS") | Acquired: June 29, 2007 | |
Blue Hill Data Services, Inc. ("Blue Hill") | Acquired: October 10, 2007 | |
BPO Management Services, Ltd. ("BPOMS Ltd") (2) | Amalgamation: January 1, 2008 | |
Healthaxis Inc. ("Healthaxis") (3) | Acquired: December 30, 2008 |
(1)
Effective January 1, 2008, Digica was merged with Blue Hill
(2) On
January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one
company, BPO Management Services, Ltd. These operations were
sold in
July 2009 as discussed in Note 3.
(3)
Because the merger of Legacy BPOMS and Legacy Healthaxis took place at the
end of fiscal 2008, the operating results for the three and nine months
ended
September 30, 2009 include those of the Healthcare segment, while the
operating
results for the three and nine months ended September 30, 2008 do not
include the Healthcare segment.
Going
Concern
The
Company incurred a loss from continuing operations of $7.8 million and a net
decline in cash of $1.9 million for the nine months ended September 30, 2009.
The Company has historically funded its operations from the private placement of
shares of its common stock and preferred stock and through the founders’ bridge
loan facility established in August 2006. To meet the needs of the current
business and to fund growth, the Company anticipates raising capital by issuing
its securities and/or debt in one or more private transactions, by way of a
strategic merger or divestiture of certain assets or operations.
The
Company’s future capital requirements will depend upon many factors. These
factors include but are not limited to sales and marketing efforts, the
development of new products and services, possible future corporate mergers or
strategic acquisitions or divestitures, the progress of research and development
efforts, and the status of competitive products and services. If the
Company’s anticipated financing transactions do not take place at all and/or are
unreasonably delayed, the Company may not have adequate funds to extinguish all
remaining liabilities of the Company and fund its current operations going
forward.
Although
the Company expects to meet its operating capital needs through one or more
financing transactions, merger or divestiture of certain assets or operations,
there can be no assurance that funds required will be available on terms
acceptable to the Company, if at all. If the Company is unable to raise
sufficient funds on acceptable terms, it may be not be able to complete its
business plan or otherwise continue to operate its business. If equity financing
is available to the Company on acceptable terms, it could result in dilution to
the Company’s existing stockholders.
The
report of the Company's independent registered public accounting firm dated
March 31, 2009 contained in the Company's condensed consolidated financial
statements as of and for the year ended December 31, 2008 included a paragraph
that explains that the Company had incurred recurring operating losses, a
working capital deficit and an accumulated deficit of $28.7 million as of
December 31, 2008. The report concluded that these matters, among others, raised
substantial doubt about the Company's ability to continue as a going concern.
8
Concentration
of Risk
The
Company is subject to credit risk primarily through its accounts receivable
balances. The Company does not require collateral for its accounts receivable
balances. For the three and nine months ended September 30, 2009 one customer
accounted for $1.1 million (18%) and $3.2 million (16%), respectively, of the
Company’s total revenues. At September 30, 2009 and December 31,
2008, two customers individually accounted for more than 10% of the Company’s
accounts receivable as shown in the table below.
Percent of accounts and note
receivable
|
||||||||
September 30, 2009
|
Dec. 31, 2008
|
|||||||
Customer
A
|
19% | 13% | ||||||
Customer
B
|
11% | 11% |
Research
and Development
The
Company's research and development ("R&D") costs consist mainly of
software developers' salaries. The Company follows Generally Accepted
Accounting Principals (“GAAP”) to capitalize software development costs
when technological feasibility has been established and to stop
capitalization when the product is available for general release to
customers. The Company capitalized software development costs of approximately
$140,755 and $142,741 during the three months ended September 30, 2009 and 2008,
respectively and $446,544 and $380,341 during the nine months ended September
30, 2009 and 2008, respectively.
Subsequent
Events
The
Company’s Management has evaluated subsequent events through November 13,
2009, which is the date that the Company’s condensed consolidated financial
statements were filed. Management is aware of no material subsequent events that
have occurred since September 30, 2009 that would require recognition or
disclosure in the condensed consolidated financial statements.
Reclassifications
Certain
reclassifications have been made to the prior period condensed consolidated
financial statements to conform to the current presentation. For
2008, amounts have been reclassified to reflect discontinued operations on the
condensed consolidated statements of operations, condensed consolidated balance
sheets, condensed consolidated statements of cash flows and in the notes
contained herein (see Note 3).
Basic and
Diluted Loss Per Share
In
accordance with GAAP, we calculate basic and diluted net loss per share
using the weighted average number of common shares outstanding during the
periods presented and adjust the amount of net loss, used in this
calculation, for preferred stock dividends declared during the
period.
We
incurred a net loss in each period presented, and as such, did not
include the effect of potentially dilutive common stock equivalents in the
diluted net loss per share calculation, as their effect would be
anti-dilutive for all periods. Potentially dilutive common stock
equivalents would include the common stock issuable upon the conversion of
preferred stock and the exercise of warrants and stock options that have
conversion or exercise prices below the market value of our common stock at
the measurement date. As of September 30, 2009 and 2008, all potentially
dilutive common stock equivalents amounted to 27,643,809 and 142,383,018
shares, respectively.
9
The
following table illustrates the computation of basic and diluted loss per
share from continuing and discontinued operations:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
Loss
From Continuing Operations:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Numerator:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (4,011,830 | ) | $ | (1,126,318 | ) | $ | (7,787,835 | ) | $ | (2,966,437 | ) | ||||
Less:
|
||||||||||||||||
Preferred
dividends paid in stock
|
- | (34,759 | ) | - | (68,836 | ) | ||||||||||
Loss
and numerator used in computing basic and diluted loss per
share
|
$ | (4,011,830 | ) | $ | (1,161,077 | ) | $ | (7,787,835 | ) | $ | (3,035,273 | ) | ||||
Loss
From Discontinued Operations:
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Loss
from discontinued operations and numerator used in computing basic
and diluted loss per share
|
$ | (203,854 | ) | $ | (736,088 | ) | $ | (2,942,175 | ) | $ | (1,599,374 | ) | ||||
Denominator:
|
||||||||||||||||
Denominator
for basic and diluted net loss per share-weighted average number of
common shares outstanding
|
15,138,379 | 12,671,034 | 15,156,517 | 12,529,216 | ||||||||||||
Loss
per share - basic and dilluted
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.27 | ) | $ | (0.09 | ) | $ | (0.51 | ) | $ | (0.24 | ) | ||||
Loss
from discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.19 | ) | (0.13 | ) | ||||||||
Net
loss per share - basic and diluted
|
$ | (0.28 | ) | $ | (0.15 | ) | $ | (0.70 | ) | $ | (0.37 | ) |
The
following table sets forth potential shares of common stock that are
not included in the diluted net loss per share because to do so would
be antidilutive since the company reported net losses in all the
reporting periods:
As
of September 30,
|
|||||||||
2009
|
2008
|
||||||||
Options
to purchase shares of common stock
|
4,492,563 | 5,002,954 | |||||||
Warrants
to purchase shares of common stock
|
2,047,291 | 68,086,261 | |||||||
Shares
of convertible preferred stock - Legacy BPOMS Series A
|
- | 1,637,710 | |||||||
Shares
of convertible preferred stock - Legacy BPOMS Series B
|
- | 1,449,204 | |||||||
Shares
of convertible preferred stock - Legacy BPOMS Series D
|
- | 22,833,341 | |||||||
Shares
of convertible preferred stock - Legacy BPOMS Series D-2
|
- | 20,999,998 | |||||||
Shares
of convertible preferred stock - Legacy BPOMS Series F
|
22,373,550 | ||||||||
Shares
of convertible preferred stock - Series B
|
21,103,955 | - | |||||||
Total
|
27,643,809 | 142,383,018 |
10
Impact of Recently Issued Accounting Standards
In June
2009, the FASB issued a new accounting standard which provides guidance in
accounting for transfers of financial assets to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This standard must be applied as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. This standard must be applied to
transfers occurring on or after the effective date. We are currently
evaluating the potential impact that the adoption of this statement will have on
our financial position and results of operations and will adopt the provisions
of this standard in fiscal 2010.
In June
2009, the FASB issued a new accounting standard which changes the
consolidation rules as they relate to variable interest entities. Specifically,
the new standard makes significant changes to the model for determining who
should consolidate a variable interest entity, and also addresses how often this
assessment should be performed. This standard is effective for
financial statements issued for fiscal years beginning after November 15, 2009,
with earlier adoption prohibited. We are currently evaluating the
potential impact that the adoption of this standard will have on our financial
position and results of operations and will adopt the provisions of this
standard in fiscal 2010.
In June
2009, the FASB issued new accounting standards codification and the hierarchy of
generally accepted accounting principles. This Codification is now the
single source of authoritative United States accounting and reporting standards
applicable for all non-governmental entities, with the exception of the SEC and
its staff. The Codification, which changes the referencing of financial
standards, is effective for interim or annual financial periods ending after
September 15, 2009. Therefore, in all references made to US GAAP will now
use the new Codification numbering system prescribed by the FASB. As the
Codification is not intended to change or alter existing US GAAP, it is not
expected to have any impact on our consolidated financial position or results of
operations.
In
October 2009, the FASB issued a new accounting standard which provides guidance
for arrangements with multiple deliverables. Specifically, the new standard
requires an entity to allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative selling
prices. In addition, the new standard eliminates the use of the residual
method of allocation and requires the relative-selling-price method in all
circumstances in which an entity recognizes revenue for an arrangement with
multiple deliverables. In October 2009, the FASB also issued a new
accounting standard which changes revenue recognition for tangible products
containing software and hardware elements. Specifically, if certain
requirements are met, revenue arrangements that contain tangible products with
software elements that are essential to the functionality of the products are
scoped out of the existing software revenue recognition accounting guidance and
will be accounted for under the multiple-element arrangements revenue
recognition guidance discussed above. Both standards will be effective for us in
the first quarter of 2011. Early adoption is permitted. We are
currently evaluating the impact of the adoption of these accounting standards on
our condensed consolidated financial statements.
3. Sale
of Discontinued Operations
In the
second quarter of 2009, the Board of Directors authorized management to pursue
the sale of the BPOMS’ Canadian operations (“BPOMS Ltd.”). On July 30, 2009,
BPOMS entered into a Share Purchase Agreement with CriticalControl Solutions
Corp., an Alberta corporation located in Calgary, Alberta, Canada which then
closed on July 31, 2009. Under the terms of the Agreement, BPOMS sold
all of the issued and outstanding capital stock of BPOMS Ltd., an Ontario
corporation and all intercompany debt owed by BPOMS, Ltd., to the
buyer. The total purchase price payable at closing to BPOMS was
100,000 Canadian Dollars. BPOMS, Ltd., with the backing of the buyer,
became responsible for its outstanding liabilities (which totaled $4.7 million
Canadian Dollars at closing).
BPOMS
Ltd. operations have been accounted for as discontinued operations in prior
periods. The results of operations of these businesses have been
removed from the results of continuing operations for all periods
presented. The assets and liabilities of discontinued operations have
been reclassified and are segregated in the condensed consolidated balance
sheets. The Company recorded an impairment charge of approximately $2,420,170 in
the second quarter of 2009 to write down the discontinued operations to its
estimated fair value. During the third quarter of 2009, the sale of BPOMS, Ltd.
resulted in an additional charge to discontinued operations of approximately
$203,854. BPOMS, Ltd. was the operating subsidiary in which all of the Company’s
Canadian operations were maintained and represents a substantial component of
its ECM business.
11
The operating results of the Canadian based business have been classified as discontinued operations and are summarized below:
Discontinued
Operations
|
||||||||||||||||
For
the three months ended
|
For
the nine months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | - | $ | 2,149,545 | $ | 6,252,893 | $ | 9,829,511 | ||||||||
Loss
from discontinued operations
|
$ | (203,854 | ) | $ | (2,462,660 | ) | $ | (2,942,175 | ) | $ | (1,599,374 | ) | ||||
Loss
per share from discontinuted operations
|
$ | (0.01 | ) | $ | (0.19 | ) | $ | (0.19 | ) | $ | (0.13 | ) | ||||
Basic
and diluted weighted average common shares
outstanding
|
15,138,379 | 12,671,034 | 15,156,517 | 12,529,216 |
The assets and liabilities of BPOMS Ltd. held for sale as of December 31, 2008 are summarized below:
December
31,
|
|||||
Assets
Held For Sale
|
2008
|
||||
Cash
and cash equivalents
|
$ | - | |||
Accounts
receivable, net
|
2,017,649 | ||||
Inventory
|
181,968 | ||||
Prepaid
expenses and other current assets
|
91,013 | ||||
Total
current assets
|
2,290,630 | ||||
Equipment,
net
|
565,564 | ||||
Goodwill
|
2,574,107 | ||||
Intangible
assets, net
|
1,307,874 | ||||
Other
assets
|
- | ||||
Total
non-current assets
|
$ | 4,447,545 | |||
Liabilities
Associated With Assets Held For Sale
|
|||||
Bank
debt
|
$ | 1,257,482 | |||
Accounts
payable
|
1,016,200 | ||||
Accrued
expenses
|
572,551 | ||||
Deferred
revenues
|
865,862 | ||||
Income
taxes payable
|
146,695 | ||||
Other
current liabilities
|
242,647 | ||||
Total
current liabilities
|
4,101,437 | ||||
Long-term
bank debt
|
5,694 | ||||
Total
non-current liabilities
|
$ | 5,694 |
12
4. Business
Combinations
On
December 30, 2008, the Company completed a reverse merger with Healthaxis, in
which it exchanged its outstanding common and preferred series shares for the
outstanding common and preferred shares of Healthaxis. The following
table summarizes estimated fair values of the assets acquired and liabilities
assumed from Healthaxis at the date of acquisition:
Healthaxis
|
||||||
Cash
& cash equivalents
|
$ | 1,973,907 | ||||
Accounts
receivable
|
2,212,972 | |||||
Prepaids
|
2,068,757 | |||||
Property,
plant and equipment
|
2,917,563 | |||||
Other
assets
|
959,349 | |||||
Goodwill
|
2,282,064 | |||||
Identifiable
intangible assets
|
1,600,000 | |||||
Total
assets acquired
|
14,014,612 | |||||
Current
liabilities
|
5,656,486 | |||||
Other
non current liabilities
|
1,360,147 | |||||
Total
liabilities assumed
|
7,016,633 | |||||
Net
assets acquired
|
$ | 6,997,979 |
An
acquired identifiable intangible asset in the amount of $1,600,000 was assigned
to customer contracts. The purchase price and costs associated with
the reverse merger of Healthaxis exceeded the Company’s allocation of the fair
value of net assets acquired by $2,282,064, which was assigned to
goodwill. The amount assigned to goodwill is not expected to be
deductible for United States income tax or state income tax
purposes.
The
following unaudited pro forma information presents the combined results of
operations of the Company as though the merger with Healthaxis had been
consummated on January 1, 2008. The pro forma financial information does
not necessarily reflect the actual results of operations had the merger been
consummated at the beginning of the period or which may be attained in the
future.
13
Unaudited
Pro Forma Statement of Operations For the Three Months Ended September 30,
2008:
BPOMS
|
Healthaxis
|
Pro
Forma
|
|||||||||||
Revenues
|
$ | 3,743,312 | $ | 3,676,000 | $ | 7,419,312 | |||||||
Net
loss
|
$ | (1,862,406 | ) | $ | (7,678,000 | ) | $ | (9,540,406 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.15 | ) | $ | (0.91 | ) | $ | (0.63 | ) | ||||
Basic
and diluted weighted average common shares
outstanding
|
12,671,034 | 8,427,295 | 15,138,379 |
Unaudited
Pro Forma Statement of Operations For the Nine Months Ended September 30,
2008:
BPOMS
|
Healthaxis
|
Pro
Forma
|
|||||||||||
Revenues
|
$ | 11,166,690 | $ | 11,615,000 | $ | 22,781,690 | |||||||
Net
loss
|
$ | (4,565,811 | ) | $ | (8,301,000 | ) | $ | (12,866,811 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.36 | ) | $ | (0.99 | ) | $ | (0.85 | ) | ||||
Basic
and diluted weighted average common shares
outstanding
|
12,529,216 | 8,385,149 | 15,156,517 |
5.
Lines of Credit and Long-Term Debt
Blue Hill
has a credit facility from Comerica Bank which includes a revolving operating
line limited to the lesser of the $1,000,000 maximum availability or 80% of
eligible accounts receivable and carries interest at the daily adjusting LIBOR
rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term
loan amortized over a four year period and bearing interest at the Comerica Bank
prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific
advance facility for equipment purchases up to a maximum of $500,000 bearing
interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at
September 30, 2009 and a specific advance facility for equipment purchases up to
a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus
6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by
a general security interest in all the assets of Blue Hill and the operating
facility is also supported by the guaranty of Legacy BPOMS and the subordination
of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to
Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of
$646,485 under the operating line, $291,667 under the term loan, $43,687 under
the equipment loan and $674,000 under the second equipment
loan. These loan agreements contain covenants pertaining to
maintenance of various ratios. At September 30, 2009, the Company was
in breach of these covenants. Under the terms of the agreement, the
bank may call the loans if the Company is in violation of any restrictive
covenant. The bank has provided a notice of default to the Company
and has not waived the ratio requirement. Accordingly the entire amount of the
loans, $1,655,839, including the long-term portion of approximately $717,108,
has been included in current liabilities.
14
On July
22, 2009, certain of the Company’s healthcare subsidiaries entered into an
amended and restated loan and security agreement with Silicon Valley Bank (the
“Amended LSA”). Under this agreement, the subsidiaries may borrow up
to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable
subject to certain adjustments. Advances under the Amended LSA bear
interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a
collateral handling fee of 0.35% per month. The Amended LSA contains
customary affirmative and negative covenants including the maintenance of a
specified level of EBITDA as defined by the Amended LSA. Advances
under the Amended LSA are covered by a first priority lien on substantially all
the assets of the Company’s healthcare subsidiaries, including intellectual
property. The Amended LSA matures June 14, 2010. At
September 30, 2009, the Company’s healthcare subsidiaries had outstanding
balances of $1,224,130 and $170,376 under the related revolving line and
equipment line, respectively.
6. Related
Party Transactions
The
Company is a party to a Remote Resourcing Agreement with Healthcare BPO Partners
L.P., a company affiliated with a significant shareholder. Healthcare BPO
Partners, based in Jaipur, India, provides personnel and infrastructure that is
utilized by the Company to provide business process outsourcing services and
other software development and technical support services to support the
Company’s operations. The resources provided by Healthcare BPO Partners
supplement the Company’s existing wholly-owned operations in Utah, Texas and
Jamaica. For the three and nine months ended September 30, 2009, the
Company incurred costs of approximately $111,000, and $334,000 related to the
Resourcing Agreement. At September 30, 2009 and December 31, 2008, the
Company had accounts payable to Healthcare BPO Partners of approximately $86,000
and $124,000, respectively.
7.
Segment and Geographic Data
The
Company is a business process outsourcing services provider. The
Company's operating segments are:
●
|
Information
Technology services outsourcing (ITO),
|
●
|
Healthcare
administrative systems and related services and financial and accounting
outsourcing services or (Healthcare) and
|
●
|
Human
resources outsourcing (HRO)
|
The
Company applies GAAP which requires segments to be determined and reported
based on how management measures performance and makes decisions about
allocating resources. The Company's management monitors unallocable
expenses related to the Company's corporate activities in a
separate "Corporate," which is reflected in the tables below.
Due to
the classification of BPOMS Ltd. as discontinued operations, these operations
have been removed from the segment discussion contained herein. The
operations of BPOMS Ltd. comprised approximately 95% of the segment the Company
had previously reported as its ECM operations, thus the Company has eliminated
any further discussion of the ECM segment and has reclassified the remaining
former ECM operations in its ITO Operations discussion.
15
The
significant components of worldwide operations by reportable
operating segment for the three and nine months ended September 30, 2009
and 2008, respectively, are:
For
the three months ended
|
For
the nine months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
||||||||||||||||
ITO
|
$ | 2,676,977 | $ | 3,377,155 | $ | 8,510,841 | $ | 9,827,698 | ||||||||
Healthcare
|
3,334,816 | - | 10,446,628 | - | ||||||||||||
HRO
|
86,139 | 366,157 | 614,978 | 1,338,992 | ||||||||||||
Consolidated
|
$ | 6,097,932 | $ | 3,743,312 | $ | 19,572,447 | $ | 11,166,690 | ||||||||
Operating
income (loss)
|
||||||||||||||||
ITO
|
$ | (825,345 | ) | $ | (65,139 | ) | $ | (2,324,955 | ) | $ | 107,271 | |||||
Healthcare
|
145,019 | - | 396,211 | - | ||||||||||||
HRO
|
(59,589 | ) | (154,683 | ) | (259,973 | ) | (314,002 | ) | ||||||||
Corporate
|
(3,142,317 | ) | (846,895 | ) | (5,178,730 | ) | (2,560,872 | ) | ||||||||
Consolidated
|
$ | (3,882,232 | ) | $ | (1,066,717 | ) | $ | (7,367,447 | ) | $ | (2,767,603 | ) | ||||
Depreciation
and amortization expense
|
||||||||||||||||
ITO
|
$ | 544,151 | $ | 456,406 | $ | 1,538,490 | $ | 1,312,539 | ||||||||
Healthcare
|
411,935 | - | 1,275,045 | - | ||||||||||||
HRO
|
13,611 | 23,289 | 40,768 | 153,868 | ||||||||||||
Corporate
|
62,409 | 65,086 | 191,418 | 194,265 | ||||||||||||
Consolidated
|
$ | 1,032,106 | $ | 544,781 | $ | 3,045,721 | $ | 1,660,672 |
The
Company's continuing consolidated operations are based in domestic and foreign
subsidiaries and branch offices in the U.S. and Germany. The following are
significant components of worldwide operations by geographic
location:
For
the three months ended
|
For
the nine months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
||||||||||||||||
North
America
|
$ | 6,009,192 | $ | 3,496,174 | $ | 19,220,235 | $ | 10,561,481 | ||||||||
Europe
|
88,740 | 247,138 | 352,212 | 605,209 | ||||||||||||
Consolidated
|
$ | 6,097,932 | $ | 3,743,312 | $ | 19,572,447 | $ | 11,166,690 | ||||||||
At
|
At
|
|||||||||||||||
September
30,
|
December
31,
|
|||||||||||||||
Long-Lived
Assets
|
2009 | 2008 | ||||||||||||||
North
America
|
$ | 11,049,120 | $ | 18,956,867 | ||||||||||||
Europe
|
26,998 | 15,515 | ||||||||||||||
Consolidated
|
$ | 11,076,118 | $ | 18,972,382 |
16
8. Restructuring
Plan and Liability
In the
second quarter of 2009, the Company initiated a restructuring program to reduce
overhead costs, which included workforce reduction and consolidation of
administrative activities. These restructuring charges are generally
of a nonrecurring nature and are excluded from segment financial results, which
is our measure used for evaluating performance and for decision-making
purposes. For the quarter ended June 30, 2009, we recorded
approximately $150,000 related to employee severance and approximately $232,000
for lease exit costs based on the present value of remaining lease rentals
reduced by estimated sublease rentals that could be reasonably obtained for the
property. The Company paid approximately $31,000 during the three
months ended September 30, 2009 with a remaining restructuring liability of
$316,711 as of September 30, 2009.
9. Commitments
and Contingencies
From time
to time we may be involved in claims arising in the ordinary course of business.
However, except as described below, there are no other pending legal proceedings
or claims to which we are a party or of which any of our property is subject
that in the opinion of management, could reasonably be expected to have a
material adverse effect on our business or financial condition. Due to our cash
flow constraints, the number of vendors with past due balances and the aggregate
dollar amount of those past due balances have continued to grow. We expect
that the number of threatened claims will continue to grow and that some of
these vendors may file lawsuits seeking to collect amounts owed. The
Company does not believe that current threats of litigation from any single
vendor would materially impact the Company, but the aggregate value of the
claims could have a material negative impact on the Company if a substantial
number of these vendors file lawsuits against us.
BridgePointe
Master Fund Ltd.
The
Company is a defendant along with two of its officers in a lawsuit that
commenced on May 28, 2009 in the Supreme Court of the State of New York, County
of New York, Index No. 601661-2009 entitled BridgePointe Master Fund Ltd. v. BPO
Management Services, Inc., James Cortens, and Patrick Dolan. The
complaint asserts, among other things, claims for (1) breach of certain
provisions of warrants held by BridgePointe; (2) breach of the implied covenant
of good faith and fair dealing related to certain stock agreements to which
Legacy BPOMS and BridgePointe were parties; and (3) breach of fiduciary duty
against two executive officers of BPO Management Services, Inc., Mr. Patrick
Dolan and Mr. James Cortens. The complaint seeks damages in excess of $3.2
million from the Company and the other defendants. The Company does not
currently believe that the claims have any merit. On August 25, 2009, the
Company filed its answer and a motion to dismiss the claims against the two
officers and directors named in the suit. The Company intends to continue
to vigorously defend the lawsuit.
10. Goodwill
and Intangible Asset Impairment
17
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking
Statements
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are
based on our current expectations, assumptions, estimates, and projections about
us and our industry and generally include the plans and objectives of management
for future operations, including plans and objectives relating to our future
economic performance. You can identify certain forward-looking
statements by our use of forward-looking terminology such as the words “may,”
“will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,”
“forecasts,” “projects,” “should,” “could,” “seek,” “pro forma,” “goal,”
“continues,” “anticipates,” or similar expressions. These
forward-looking statements include, in particular, statements about our plans,
strategies, and prospects under this heading, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and under the
heading “Business.” These forward-looking statements necessarily
depend upon assumptions and estimates that may prove to be
incorrect. Although we believe that the assumptions and estimates
reflected in the forward-looking statements are reasonable, we cannot guarantee
that we will achieve our plans, intentions, or expectations. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results to differ in significant ways from
any future results expressed or implied by the forward-looking
statements. Some of these risks, uncertainties and other factors are
identified under the heading “Risk Factors,” and you should carefully consider
such risks, uncertainties and other factors before deciding to invest or
maintain an investment in shares of our stock. Any of the factors
referenced under the heading “Risk Factors” or elsewhere could cause our future
financial results, including our net income (loss) or growth in net income
(loss) to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate
substantially.
Overview
On
December 30, 2008, Healthaxis Inc., a Pennsylvania corporation incorporated in
1982 (“Legacy Healthaxis”), completed a merger resulting in BPO Management
Services, Inc., a Delaware corporation (“Legacy BPOMS”), becoming a wholly-owned
subsidiary of Healthaxis (the “Merger”). Legacy Healthaxis changed
its name to “BPO Management Services, Inc.” upon the closing of the Merger
(“BPOMS”). Immediately following the closing of the Merger, Legacy
BPOMS’ pre-Merger shareholders held approximately 75% of BPOMS’ shares, and
Legacy Healthaxis’ pre-Merger shareholders retained approximately 25% of BPOMS’
shares, all on a fully diluted, as-converted basis. Notwithstanding
the fact that Legacy Healthaxis was the legal acquirer under the Merger and
remains the registrant for SEC reporting purposes, the Merger was accounted for
as a reverse acquisition with Legacy BPOMS as the accounting
acquirer. BPOMS has accounted for the Merger as a purchase business
combination, using Legacy BPOMS’ historical financial information and accounting
policies and applying fair value estimates to the acquired assets, liabilities
and commitments of Legacy Healthaxis as of December 30, 2008.
The
financial information contained in this report reflects the Merger as if Legacy
BPOMS had issued consideration to Legacy Healthaxis shareholders. As
a result, financial information derived from the Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows
included with this report for the three and nine months ended September 30, 2008
reflects the consolidated financial results of Legacy BPOMS alone, while
financial information derived from the Condensed Consolidated Statements of
Operations and Condensed Consolidated Statements of Cash Flows for the three and
nine months ended September 30, 2009 reflects the post-merger consolidated
financial results of BPOMS. Financial information derived from the
Consolidated Balance Sheet at December 31, 2008 reflects the consolidated assets
and liabilities of Legacy BPOMS and Legacy Healthaxis at December 31, 2008,
while financial information derived from the Condensed Consolidated Balance
Sheet at September 30, 2009 reflects the post-merger consolidated assets and
liabilities of BPOMS. Please see Note 4 in the Notes to Condensed
Consolidated Financial Statements for additional discussion of the Merger and a
pro forma presentation of financial results for the combined companies for the
three and nine months ended September 30, 2008.
Legacy
BPOMS was incorporated in 1981 under the name Research Engineers, Inc., changed
its name to netGuru, Inc. in 2000 and to BPO Management Services, Inc. on
December 15, 2006 immediately following its reverse merger with privately-held
BPO Management Services, Inc. (“Private BPOMS”). Private BPOMS was
incorporated in July 2005. On December 15, 2006, Private BPOMS acquired all of
the outstanding common stock of publicly-held netGuru, Inc. in a reverse
merger. Private BPOMS was the accounting acquirer.
18
We
provide business process outsourcing (BPO) services primarily to middle-market
enterprises in the United States. “BPO” refers to the outsourcing
of entire business processes, typically to reduce cost and/or to improve
the performance of that process. Our objective is to provide a
comprehensive suite of BPO functions to support the back-office business
requirements of middle-market enterprises on an outsourced and/or recurring
revenue basis.
Our
primary business offerings are:
●
|
Information
technology services outsourcing or “ITO”;
|
●
|
Healthcare
administrative systems and related services and financial and accounting
outsourcing services or “Healthcare and F&A”, and
|
●
|
Human
resources information systems and related outsourcing services, or
“HRO”
|
As of
July 31, 2009, the Company divested its Canadian operations, and thus the
financial information in this report is provided for the Canadian operations as
discontinued operations, and the results of the Canadian operations have
therefore been removed from the following discussion of the results of
continuing operations.
Our
business plan for 2009 is to focus on our core strengths in information
technology outsourcing and our offerings in managed services and software for
healthcare benefits administration, finance and accounting, and human
resources. We believe that our growth opportunities in these areas
are the keys for putting BPOMS on a faster track for growth and
profitability. In the second quarter of 2009, we initiated a
restructuring program to reduce overhead costs, which included workforce
reduction and consolidation of administrative activities. We will
continue our work on integrating the Company’s operations to achieve additional
financial synergies. Our longer term strategy continues to focus on
organic growth and accretive acquisitions. Our business and strategic
plans for 2009 are likely to be negatively impacted by the current severe
financial conditions and resulting poor business environment. In the
current environment, customers and prospects are likely to delay or avoid making
decisions on whether to outsource business process functions, making sales
extremely difficult to close. The financial health of some of our
customers may also be at risk and we may see declines in volume as some
customers scale back their operations or cease activities that rely on our
services. The current condition of the capital markets will also have
a negative impact on our plans for strategic growth and may limit our options
for raising needed additional capital as described below under the caption
“Liquidity and Capital Resources.”
The third
quarter loss from operations was $3.9 million, which included non-cash expenses
for depreciation and amortization of $1.0 million and for goodwill and
intangible asset impairment of $2.4 million. We are starting to
realize cost savings from our restructuring efforts as evidenced by the $527,000
reduction in selling, general and administrative expense as compared to the
second quarter of 2009. More importantly, our ITO operations have
recently signed contracts with new customers with a total contract value
exceeding $5.0 million and have several more opportunities with total contract
value of more than $9.0 million in the contracting or advanced negotiation
stage.
Consolidated
Results of Operations
Legacy
BPOMS began operations in July 26, 2005 and merged with netGuru, Inc. on
December 15, 2006 in a reverse merger. For accounting purposes, the
acquisition was treated as a recapitalization of Legacy BPOMS with Legacy BPOMS
as the acquirer. The historical statements of operations included in this annual
report for the three and nine months ended September 30, 2008, are those of
Legacy BPOMS.
19
Except as
referenced in footnote (2) below, the following entities of Legacy BPOMS are
included in the consolidated results of operations from the date of their
respective acquisitions:
Company
|
Segment
|
Inception/Acquisition
Date
|
||
BPO
Management Services, Inc. (the "Company") or ("BPOMS")
|
Corporate
|
Inception
date: July 26, 2005
|
||
Adapsys
Document Management LP ("ADM") (2)
|
(2) |
Acquired: July
29, 2005
|
||
Adapsys
LP ("ADP") (2)
|
(2) |
Acquired: July
29, 2005
|
||
Digica,
Inc. ("Digica") (1)
|
ITO
|
Acquired: January
1, 2006
|
||
Novus
Imaging Solutions, Inc. ("Novus") (2)
|
(2) |
Acquired: September
30, 2006
|
||
NetGuru
Systems, Inc. ("NGSI")
|
ITO
|
Acquired: December
15, 2006
|
||
Research
Engineers, GmbH ("GmbH")
|
ITO
|
Acquired: December
15, 2006
|
||
DocuCom
Imaging Solutions, Inc. ("DocuCom") (2)
|
(2) |
Acquired: June
21, 2007
|
||
Human
Resource Micro-Systems, Inc. ("HRMS")
|
HRO
|
Acquired: June
29, 2007
|
||
Blue
Hill Data Services, Inc. ("Blue Hill")
|
ITO
|
Acquired: October
10, 2007
|
||
BPO
Management Services, Ltd. ("BPOMS Ltd") (2)
|
(2) |
Amalgamation:
January 1, 2008
|
||
Healthaxis
Inc. ("Healthaxis") (3)
|
Healthcare
|
Acquired: December
30, 2008
|
(1)
Effective January 1, 2008, Digica was merged with Blue Hill
(2) On
January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one
company, BPO Management Services, Ltd. These operations were
sold in
July 2009 as discussed in Note 3.
(3)
Because the merger of Legacy BPOMS and Legacy Healthaxis took place at the
end of fiscal 2008, the operating results for the three and nine months
ended
September 30, 2009 include those of the Healthcare segment, while the
operating
results for the three and nine months ended September 30, 2008 do not
include the Healthcare segment.
Operations
Reporting
BPOMS
combines its continuing operating entities into three separate reporting
segments:
●
|
IT
Outsourcing (“ ITO”) comprised of Blue Hill, Digica (which was merged with
Blue Hill in January 2008), NGSI and GmbH,
|
●
|
Healthcare
comprised of Legacy Healthaxis, and
|
●
|
Human
Resources Outsourcing (“HRO”) comprised of
HRMS.
|
20
Three Months Ended September
30, 2009 Compared to Three Months Ended September 30, 2008
ITO
Operations
For
the three months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Revenues:
|
$ | 2,676,977 | $ | 3,377,155 | $ | (700,178 | ) | ||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
1,918,628 | 1,733,499 | (185,129 | ) | |||||||||
Selling,
general and administrative
|
915,114 | 1,171,168 | 256,054 | ||||||||||
Research
and development
|
124,429 | 81,221 | (43,208 | ) | |||||||||
Depreciation
and amortization
|
544,151 | 456,406 | (87,745 | ) | |||||||||
Total
operating expenses
|
3,502,322 | 3,442,294 | (60,028 | ) | |||||||||
Loss
from operations before interest and income taxes
|
$ | (825,345 | ) | $ | (65,139 | ) | $ | (760,206 | ) |
Sales for
the three months ended September 30, 2009 of $2,676,977 decreased 21% from
$3,377,155 for the three months ended September 30, 2008 due to a decline in
information technology consulting services provided on a time and materials
basis, reduced sales of collaborative software tools, and the loss of legacy
data center customers that were acquired and consolidated their IT operations
with those of the acquiror. Cost of services provided of $1,918,628
increased from $1,733,499 primarily due to increased costs for software and
licensing fees of approximately $300,000, offset with reductions of consulting
costs of approximately $130,000. Much of these expenses related to
securing and related increasing support of additional contracts that are
anticipated to generate greater revenue as they come on stream. Selling, general
and administrative expenses of $915,114 decreased 22% from $1,171,168 primarily
due to a decrease in payroll costs of approximately $48,000 and consulting costs
of approximately $190,000. Research and development (“R&D”)
expenses for the three months ended September 30, 2009 of $124,429 increased
$43,208 from $81,221 primarily due to increases in software developers’ wages
for development of enhancements to and integrations with the EReview
collaborative software product. Depreciation and amortization
expenses for the three months ended September 30, 2009 increased $87,745
primarily due to the acquisition of fixed assets throughout 2008 and 2009,
offset by the reduction of amortization expense of approximately $112,500 due to
the impairment loss of $2,765,429 on intangible assets recorded at December 31,
2008.
Healthcare
Operations (1)
September
30,
|
|||||||||||||
For
Three Months Ended
|
2009
|
%
of Revenue
|
|||||||||||
Revenues:
|
$ | 3,334,816 | |||||||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
2,515,981 | 75.4% | |||||||||||
Selling,
general and administrative
|
261,881 | 7.9% | |||||||||||
Research
and development (2)
|
- | 0.0% | |||||||||||
Depreciation
and amortization
|
411,935 | 12.4% | |||||||||||
Total
operating expenses
|
3,189,797 | 95.7% | |||||||||||
Income
from operations before nterest and income taxes
|
$ | 145,019 | 4.3% |
(1)
|
Due
to the merger with Legacy Healthaxis occuring on December 30, 2008,
there
is no comparable 2008 period with which to compare Healthcare's
quarterly
results for the three months ended September 30,
2009.
|
(2)
|
The
Company capitalized software development costs of
approximately$118,003
for the three months ended September 30,
2009.
|
21
HRO
Operations
For
the three months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Revenues
|
$ | 86,139 | $ | 366,157 | $ | (280,018 | ) | ||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
77,181 | 110,457 | 33,276 | ||||||||||
Selling,
general and administrative
|
54,936 | 387,094 | 332,158 | ||||||||||
Depreciation
and amortization
|
13,611 | 23,289 | 9,678 | ||||||||||
Total
operating expenses
|
$ | 145,728 | $ | 520,840 | $ | 375,112 | |||||||
Loss
from operations before interest and income taxes
|
$ | (59,589 | ) | $ | (154,683 | ) | $ | 95,094 |
Sales for
the three months ended September 30, 2009 of $86,139 decreased from $366,157 for
the three months ended September 30, 2008 due to a significant drop in
professional services revenue combined with a reduction in software licensing
fees and lower maintenance renewals as companies have dramatically reduced
spending on less critical administrative applications. Cost of
services provided of $77,181 decreased from $110,457 primarily due to the
reduction of personnel. Selling, general and administrative expenses
of $54,936 decreased from $387,094 due to reductions in personnel, consultant
fees and variable sales and marketing costs. The change in
depreciation and amortization expense between periods was due to a SFAS
revaluation in the second quarter of 2008 which resulted in a reduction to the
values previously assigned to fixed assets and intangible
assets. Software development costs of approximately $29,600 and
$70,600 were capitalized for the three months ended September 30, 2009 and 2008,
respectively.
Corporate
Operations
For
the three months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Operating
expenses :
|
|||||||||||||
Selling,
general and administrative
|
$ | 723,456 | $ | 574,718 | $ | (148,738 | ) | ||||||
Depreciation
and amortization
|
62,409 | 65,086 | 2,677 | ||||||||||
Stock
based compensation
|
- | 207,091 | 207,091 | ||||||||||
Restructuring
costs
|
- | - | - | ||||||||||
Goodwill
& Intangible asset impairment
|
2,356,452 | - | (2,356,452 | ) | |||||||||
Total
operating expenses before interest and income taxes
|
$ | 3,142,317 | $ | 846,895 | $ | (2,295,422 | ) |
Selling,
general and administrative expenses for the three months ended September 30,
2009 of $723,456 increased from $574,718 for the three months ended September
30, 2008, primarily due to the addition of corporate related expenses in the
2009 period from the reverse merger with Legacy Healthaxis of approximately
$157,000 partially offset by broad-based decreases in corporate operating costs
resulting from our restructuring and consolidation efforts. The decrease in
stock-based compensation expense is a result of all Legacy BPOMS stock-based
awards becoming fully vested and completely expensed as of December 31, 2008, a
result of the reverse merger with Legacy Healthaxis on December 30,
2008. The goodwill and intangible asset impairment charge resulted
from Management’s review of the carrying value of the assets compared to their
fair value during the three months ended September 30, 2009.
22
Interest
Expense
For
the three months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Interest
expense:
|
|||||||||||||
Related
parties
|
$ | 18,782 | $ | 27,148 | 8,366 | ||||||||
Other,
net
|
110,816 | 12,953 | (97,863 | ) | |||||||||
Total
interest expense
|
$ | 129,598 | $ | 40,101 | $ | (89,497 | ) |
Total
interest expense for the three months ended September 30, 2009 of $129,598
increased $89,497 from $40,101 for the three months ended September 30,
2008, primarily due to the increased usage of various loan facilities and the
addition of approximately $57,450 in interest expense associated with the
operations of our new Healthcare segment, partially offset by the reduction in
notes payable to related parties.
Nine Months Ended September
30, 2009 Compared to Nine Months Ended September 30, 2008
ITO
Operations
For
the nine months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Revenues:
|
$ | 8,510,841 | $ | 9,827,698 | $ | (1,316,857 | ) | ||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
5,727,889 | 4,820,700 | (907,189 | ) | |||||||||
Selling,
general and administrative
|
3,220,228 | 3,358,930 | 138,702 | ||||||||||
Research
and development
|
349,189 | 228,258 | (120,931 | ) | |||||||||
Depreciation
and amortization
|
1,538,490 | 1,312,539 | (225,951 | ) | |||||||||
Total
operating expenses
|
10,835,796 | 9,720,427 | (1,115,369 | ) | |||||||||
Income
(loss) from operations before interest and income
taxes
|
$ | (2,324,955 | ) | $ | 107,271 | $ | (2,432,226 | ) |
Sales for
the nine months ended September 30, 2009 of $8,510,841 decreased 13% from
$9,827,698 for the nine months ended September 30, 2008 due to a decline in
information technology consulting services provided on a time and materials
basis, reduced sales of collaborative software tools, and the loss of legacy
data center customers that were acquired and consolidated their IT operations
with those of the acquiror. Cost of services provided of $5,727,889
increased from $4,820,700 primarily due to increased costs for software and
licensing fees of approximately $786,000 and increased wages of approximately
$265,000 offset by reductions is consulting fees of approximately
$143,000. Much of these expenses related to securing and related
increasing support of additional contracts that are anticipated to generate
greater revenue as they come on stream. Selling, general and administrative
expenses of $3,220,228 decreased from $3,358,930 primarily due to a reduction in
payroll costs of approximately $117,000, reduction in consultant fees of
approximately $147,000, partially offset with an increase in bad debt expense of
approximately $138,000. Research and development (“R&D”) expenses
for the nine months ended September 30, 2009 of $349,189 increased $120,931 from
$228,258 primarily due to increases in software developers’ wages for
development of enhancements to and integrations with the EReview collaborative
software product. Depreciation and amortization expenses for the nine
months ended September 30, 2009 increased $225,951 primarily due to the
continued acquisition of fixed assets throughout 2008 and the first nine months
of 2009, offset by the reduction of amortization expense of approximately
$337,500 due to the impairment loss of $2,765,429 on intangible assets recorded
at December 31, 2008.
23
Healthcare
Operations (1)
September
30,
|
|||||||||||||
For
Nine Months Ended
|
2009
|
%
of Revenue
|
|||||||||||
Revenues:
|
$ | 10,446,628 | |||||||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
7,984,285 | 76.4% | |||||||||||
Selling,
general and administrative
|
791,087 | 7.6% | |||||||||||
Research
and development (2)
|
- | 0.0% | |||||||||||
Depreciation
and amortization
|
1,275,045 | 12.2% | |||||||||||
Total
operating expenses
|
10,050,417 | 96.2% | |||||||||||
Income
from operations before interest and income taxes
|
$ | 396,211 | 3.8% |
(1)
Due to
the merger with Legacy Healthaxis occuring on December 30, 2008, there is
no comparable 2008 period with which to compare Healthcare's results
for the nine months ended September 30, 2009.
(2) The
Company capitalized software development costs of approximately $339,050
for the nine months ended September 30, 2009.
HRO
Operations
For
the nine months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Revenues
|
$ | 614,978 | $ | 1,338,992 | $ | (724,014 | ) | ||||||
Operating
expenses :
|
|||||||||||||
Cost
of services provided
|
295,783 | 392,468 | 96,685 | ||||||||||
Selling,
general and administrative
|
538,400 | 1,106,658 | 568,258 | ||||||||||
Depreciation
and amortization
|
40,768 | 153,868 | 113,100 | ||||||||||
Total
operating expenses
|
$ | 874,951 | $ | 1,652,994 | $ | 778,043 | |||||||
Loss
from operations before
|
|||||||||||||
interest
and income taxes
|
$ | (259,973 | ) | $ | (314,002 | ) | $ | 54,029 |
Sales for
the nine months ended September 30, 2009 of $614,978 decreased from $1,338,992
for the nine months ended September 30, 2008 primarily due to a significant drop
in professional services revenue combined with a reduction in software licensing
fees and lower maintenance renewals as companies have dramatically reduced
spending on less critical administrative applications. Cost of
services provided of $295,783 decreased from $392,468 primarily due to the
reduction of personnel. Selling, general and administrative expenses
of $538,400 decreased from $1,106,658 as reductions in personnel and variable
sales and marketing costs were somewhat offset by an increase in bad debt
expense of approximately $85,000. Depreciation and amortization
expense for the nine months ended September 30, 2009 decreased $113,100 from
$153,868 for the nine months ended September 30, 2008 primarily due to a SFAS
revaluation in the second quarter of 2008 which resulted in a reduction of
values previously assigned to fixed assets and intangible
assets. Software development costs of $84,700 and $237,600 were
capitalized for the nine months ended September 30, 2009 and 2008,
respectively.
24
Corporate Operations
For
the nine months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Operating
expenses :
|
|||||||||||||
Selling,
general and administrative
|
$ | 2,230,320 | $ | 1,745,332 | $ | (484,988 | ) | ||||||
Depreciation
and amortization
|
191,418 | 194,265 | 2,847 | ||||||||||
Stock
based compensation
|
18,333 | 621,275 | 602,942 | ||||||||||
Restructuring
costs
|
382,207 | - | (382,207 | ) | |||||||||
Goodwill
& Intangible asset impairment
|
2,356,452 | - | (2,356,452 | ) | |||||||||
Total
operating expenses before interest and income taxes
|
$ | 5,178,730 | $ | 2,560,872 | $ | (2,617,858 | ) |
Selling,
general and administrative expenses for the nine months ended September 30, 2009
of $2,230,320 increased from $1,745,332 for the nine months ended September 30,
2008. For the nine months ended September 30, 2008, the Company released a
contingent liability of approximately $215,000, and as a result, the prior year
expenses are lower by this amount. The overall change primarily
results from the release of this liability combined with corporate related
expenses in the 2009 period from the reverse merger with Legacy Healthaxis of
approximately $335,000. These changes were partially offset by a broad
based decrease of overall corporate expenses resulting from our restructuring
and consolidation efforts. The decrease in stock-based compensation
expense is a result of all Legacy BPOMS stock-based awards became fully vested
and completely expensed as of December 31, 2008, a result of the reverse merger
with Legacy Healthaxis on December 30, 2008. In the second quarter of
2009, the Company initiated a restructuring program to reduce overhead costs,
which included workforce reduction and consolidation of administrative
activities. These restructuring charges are generally of a
nonrecurring nature and are excluded from segment financial results, which is
our measure used for evaluating performance and for decision-making
purposes. For the nine months ended September 30, 2009, we recorded
approximately $150,000 related to employee severance and approximately $232,000
for lease exit costs based on the present value of remaining lease rentals
reduced by estimated sublease rentals that could be reasonably obtained for the
property. The goodwill and intangible asset impairment charge
resulted from Management’s review of the carrying value of the assets compared
to their fair value during the three months ended September 30,
2009.
Interest
Expense
For
the nine months ended September 30,
|
|||||||||||||
2009
|
2008
|
Change
|
|||||||||||
Interest
expense:
|
|||||||||||||
Related
parties
|
$ | 57,948 | $ | 80,853 | 22,905 | ||||||||
Other,
net
|
346,840 | 54,029 | (292,811 | ) | |||||||||
Total
interest expense
|
$ | 404,788 | $ | 134,882 | $ | (269,906 | ) |
Total
interest expense for the nine months ended September 30, 2009 of $404,788
increased $269,906 from $134,882 for the nine months ended September 30,
2008, primarily due to the increased usage of various loan facilities and the
addition of approximately $156,055 in interest expense associated with the
operations of our new Healthcare segment, partially offset by the reduction of
notes payable to related parties.
25
Liquidity
and Capital Resources
Overview
of Cash Resources
At
September 30, 2009, our cash and cash equivalents amounted to $1.0 million
compared to $2.9 million at December 31, 2008. The sources and
uses of cash during 2009 are described more fully in “Analysis of Cash Flows”
below. The Company’s focus is on becoming profitable and generating
positive cash flow, however in the event that we are unable to generate
sufficient cash from operations or raise additional capital, then our business
would be adversely affected.
On July
22, 2009, certain of the Company’s healthcare subsidiaries entered into an
amended and restated loan and security agreement with Silicon Valley Bank (the
“Amended LSA”). Under this agreement, the subsidiaries may borrow up
to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable
subject to certain adjustments. Advances under the Amended LSA bear
interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a
collateral handling fee of 0.35% per month. The Amended LSA contains
customary affirmative and negative covenants including the maintenance of a
specified EBITDA level. Advances under the Amended LSA are covered by
a first priority lien on substantially all the assets of the Company’s
healthcare subsidiaries, including intellectual property. The Amended
LSA matures June 14, 2010. At September 30, 2009, the Company’s
healthcare subsidiaries had outstanding balances of $1,224,130 and $170,376
under the related revolving line and equipment line, respectively.
Blue Hill
has a credit facility from Comerica Bank which includes a revolving operating
line limited to the lesser of the $1,000,000 maximum availability or 80% of
eligible accounts receivable and carries interest at the daily adjusting LIBOR
rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term
loan amortized over a four year period and bearing interest at the Comerica Bank
prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific
advance facility for equipment purchases up to a maximum of $500,000 bearing
interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at
September 30, 2009 and a specific advance facility for equipment purchases up to
a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus
6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by
a general security interest in all the assets of Blue Hill and the operating
facility is also supported by the guaranty of Legacy BPOMS and the subordination
of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to
Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of
$646,485 under the operating line, $291,667 under the term loan, $43,687 under
the equipment loan and $674,000 under the second equipment
loan. These loan agreements contain covenants pertaining to
maintenance of various ratios. At September 30, 2009, the Company was
in breach of these covenants. Under the terms of the agreement, the
bank may call the loans if the Company is in violation of any restrictive
covenant. The bank has provided a notice of default to the Company
and has not waived the ratio requirement, but has allowed the Company to
continue to borrow on the revolving line and has not demanded immediate
repayment in full of the obligations to the bank. Accordingly the
entire amount of the loans, $1,655,839, including the long-term portion of
approximately $717,108, has been included in current liabilities.
Analysis
of Cash Flows
Cash provided by operating
activities for the nine months ended September 30, 2009 was approximately
$1.1 million as compared to cash used in operating activities of approximately
$1.4 million for the same period in 2008. The improvement was
primarily the result of changes in working capital, including generating cash
from the reduction of accounts receivable combined with a higher accounts
payable balance. These increases to cash flow from operations were
partially offset by the increased net loss from continuing
operations.
Cash used in investing
activities during the nine months ended September 30, 2009 was
approximately $1.6 million as compared to cash used in investing activities of
approximately $263,000 for the same period in 2008. During the nine
months ended September 30, 2009, the Company’s purchase of equipment and
internally developed capitalized software amounted to approximately $1.6
million. For the nine months ended September 30, 2008, cash used by
investing activities was due to the purchase of equipment of approximately
$660,000, offset by the release of restricted cash in the amount of
approximately $923,000.
Net cash used in financing
activities during the nine months ended September 30, 2009 was
approximately $1.4 million as compared to net cash provided by financing
activities of approximately $3.6 million for the same period in
2008. Net cash used in financing activities for the nine months ended
September 30, 2009 is the net result of proceeds from bank loans of
approximately $111,000, payment of notes issued to former shareholders of $1.0
million, repayment of capital lease obligations of approximately $385,000,
repayment of a note payable to a related party in the amount of
$100,000. Net cash provided by financing activities for the nine
months ended September 30, 2008 is the result of proceeds from the issuance of
preferred stock of $5.2 million plus net bank borrowings of approximately
$491,000 offset by payments to former shareholders of approximately $886,000,
dividend payments of approximately $753,000, repayment of note payable to a
related party in the amount of $200,000 and capital lease obligation payments of
approximately $161,000.
26
During
the next twelve months, the Company anticipates raising capital necessary to
meet the needs of its current business, grow its business and complete
additional acquisitions by issuing its securities and/or debt in one or more
private transactions, merger, or divestiture of certain assets or
operations.
Our
future capital requirements will depend upon many factors. These factors include
but are not limited to sales and marketing efforts, the development of new
products and services, possible future corporate mergers or strategic
acquisitions or divestitures, the progress of research and development efforts,
and the status of competitive products and services. If our anticipated
financing needs are not met or are unreasonably delayed, we may not have
adequate funds to extinguish all our remaining obligations and fund our current
operations going forward.
Although
we plan to meet our operating capital needs through one or more financing
transactions, merger, or divestiture of certain assets or operations, there can
be no assurance that funds required will be available on terms acceptable to us,
if at all. If we are unable to raise sufficient funds on acceptable terms, we
may not be able to complete our business plan. If equity financing is available
to us on acceptable terms, it could result in additional dilution to our
existing stockholders.
This
uncertainty, recurring losses from operations, limited cash resources, and an
accumulated deficit, among other factors, raise doubt about our ability to
continue as a going concern and led our independent registered public accounting
firm to include an explanatory paragraph in their report dated March 31, 2009
contained in the Company's consolidated financial statements as of and for the
year ended December 31, 2008. The report concludes that these matters, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable under smaller reporting company scaled disclosure
requirements
Item
4T. Controls and Procedures
The
Company maintains "disclosure controls and procedures," as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed by the Company in reports it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management including the Company's principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
The
management of the Company has designed and evaluated the Company's disclosure
controls and procedures. Management recognizes that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable assurance of achieving the desired control objectives, and the
Company necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures.
The
Company's management, including its principal executive officer and principal
financial officer, evaluated the effectiveness of the design and operation of
its disclosure controls and procedures as of September 30, 2009, and concluded
that the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted a material weakness as
disclosed in the Company's Form 10-K for the year ended December 31, 2008. The
material weaknesses identified did not result in the restatement of any
previously reported consolidated financial statements or any other related
financial disclosure, nor does management believe that it had any effect on the
accuracy of the Company's financial statements for the current reporting
period.
Changes
in Internal Control over Financial Reporting
There has
not been any change in our internal control over financial reporting that
occurred during the quarterly period ended September 30, 2009, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
27
Item
1. Legal Proceedings
From time
to time we may be involved in claims arising in the ordinary course of business.
However, except as described below, there are no other pending legal proceedings
or claims to which we are a party or of which any of our property is subject
that in the opinion of management, could reasonably be expected to have a
material adverse effect on our business or financial condition. Due to our cash
flow constraints, the number of vendors with past due balances and the aggregate
dollar amount of those past due balances have continued to grow. We expect
that the number of threatened claims will continue to grow and that some of
these vendors may file lawsuits seeking to collect amounts owed. The
Company does not believe that current threats of litigation from any single
vendor would materially impact the Company, but the aggregate value of the
claims could have a material negative impact on the Company if a substantial
number of these vendors file lawsuits against us.
BridgePointe
Master Fund Ltd.
The
Company is a defendant along with two of its officers in a lawsuit that
commenced on May 28, 2009 in the Supreme Court of the State of New York, County
of New York, Index No. 601661-2009 entitled BridgePointe Master Fund Ltd. v. BPO
Management Services, Inc., James Cortens, and Patrick Dolan. The
complaint asserts, among other things, claims for (1) breach of certain
provisions of warrants held by BridgePointe; (2) breach of the implied covenant
of good faith and fair dealing related to certain stock agreements to which
Legacy BPOMS and BridgePointe were parties; and (3) breach of fiduciary duty
against two executive officers of BPO Management Services, Inc., Mr. Patrick
Dolan and Mr. James Cortens. The complaint seeks damages in excess of $3.2
million from the Company and the other defendants. The Company does not
currently believe that the claims have any merit. On August 25, 2009, the
Company filed its answer and a motion to dismiss the claims against the two
officers and directors named in the suit. The Company intends to continue to
vigorously defend the lawsuit.
Item
1-A. Risk Factors
Item
2. Unregistered Sales Of Equity Securities And Use Of
Proceeds
Item
3. Defaults Upon Senior Securities
Blue Hill
bank borrowing agreements contain covenants pertaining to maintenance of various
ratios. At September 30, 2009, the company was in breach of these
covenants and as of such date, the total amount outstanding under these
agreements was $1,655,839. The bank has provided a notice of default
to the Company and has not waived the ratio requirement but
has allowed the Company to continue to borrow on the revolving line and has not
demanded immediate repayment in full of the obligations to the
bank. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital
Resources.”
Item
4. Submission Of Matters To A Vote Of Security Holders
Item
5. Other Information
None.
28
Item 6. Exhibits
Exhibit
Number
|
Description
|
10.1
|
Share
Purchase Agreement dated July 30, 2009 by and between BPOMS, Inc. and
CriticalControl Solutions Corp. (1)
|
31.1
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(1)
|
31.2
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (1)
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
|
__________________
(1)
|
Attached
as an exhibit to this Form 10-Q.
|
29
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.
Date:
November 13, 2009
|
BPO
MANAGEMENT SERVICES, INC.
|
||
|
By:
|
/s/ Patrick A. Dolan | |
Chief
Executive Officer
(principal
executive officer)
|
|
By:
|
/s/ Ronald K. Herbert | |
Chief
Financial Officer
(principal
financial officer)
|
30
EXHIBITS
ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q
Exhibit
Number
|
Description
|
10.1
|
Share
Purchase Agreement dated July 30, 2009 by and between BPOMS, Inc. and
CriticalControl Solutions Corp.
|
31.1
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
31