Attached files
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EX-31.1 - MAM SOFTWARE GROUP, INC. | v196812_ex31-1.htm |
EX-31.2 - MAM SOFTWARE GROUP, INC. | v196812_ex31-2.htm |
EX-32.2 - MAM SOFTWARE GROUP, INC. | v196812_ex32-2.htm |
EX-32.1 - MAM SOFTWARE GROUP, INC. | v196812_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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FOR
THE FISCAL YEAR ENDED JUNE 30, 2010
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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FOR THE
TRANSITION PERIOD FROM ___________ TO ___________
Commission
file number 000-27083
MAM
Software Group, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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84-1108035
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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Maple
Park, Maple Court, Tankersley, Barnsley, UK S75 3DP
(Address
of principal executive offices, including zip code)
Registrant’s
telephone number, including area code: 011-44-124-431-1794
Aftersoft
Group, Inc.
(Former
name, change since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class:
|
Name
of each exchange on which registered:
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None
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.0001 par value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Act). Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes ¨ No þ
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. þ
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
¨
|
Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes ¨ No þ
As of
December 31, 2009 approximately 83,773,264 shares of common stock were
outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant, as of December 31, 2009, the last business day
of the 2 nd
fiscal quarter, was approximately $3,604,179 based on the
average high and low price of $0.06 for the registrant’s common stock as quoted
on the Over-the-Counter Bulletin Board on that date. Shares of common stock held
by each director, each officer and each person who owns 10% or more of the
outstanding common stock have been excluded from this calculation in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily conclusive.
The
registrant had 85,860,185 shares of its common stock outstanding as of August
31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
Page
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PART
I
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1
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Item
1.
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Business
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1
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Item 1A.
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Risk
Factors
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16
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Item 1B.
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Unresolved
Staff Comments
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26
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Item
2.
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Properties
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26
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Item
3.
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Legal
Proceedings
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27
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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29
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PART
II
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30
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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30
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Item
6.
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Selected
Financial Data
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32
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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32
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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56
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Item
8.
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Financial
Statements and Supplementary Data
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56
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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56
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Item 9A(T).
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Controls
and Procedures
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56
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Item 9B.
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Other
Information
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57
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PART
III
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58
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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58
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Item
11.
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Executive
Compensation
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62
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Item
12.
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Security
Ownership Of Certain Beneficial Owners And Management and Related
Stockholder Matters
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79
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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83
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Item
14.
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Principal
Accounting Fees and Services
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90
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PART
IV
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91
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Item
15.
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Exhibits,
Financial Statement Schedules
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91
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SIGNATURES
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INDEX
TO EXHIBITS
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i
PART
I
Item
1.
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Business
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Unless
the context indicates or requires otherwise, (i) the term “MAM” refers to MAM
Software Group, Inc. and its principal operating subsidiaries; (ii) the term
“MAM Software” refers to MAM Software Limited and its operating subsidiaries;
(iii) the term “ASNA” refers to Aftersoft Network N.A., Inc. and its operating
subsidiaries;(iv) the term “EXP” refers to EXP Dealer Software Limited and its
operating subsidiaries; and (v) the terms “we,” “our,” “ours,” “us” and the
“Company” refer collectively to MAM Software Group, Inc.
Our
Company
MAM
Software Group, Inc. provides software, information and related services to
businesses engaged in the automotive aftermarket in the US, Canada, UK and
Ireland. The automotive aftermarket consists of businesses associated with the
life cycle of a motor vehicle from when the original manufacturer’s warranty
expires to when the vehicle is scrapped. Products sold by businesses engaged in
this market include the parts, tires and auto services required to maintain and
improve the performance or appeal of a vehicle throughout its useful life. The
Company aims to meet the business needs of customers who are involved in the
maintenance and repair of automobiles and light trucks in three key segments of
the automotive aftermarket, namely parts, tires and auto service.
The
Company’s business management systems, information products and online services
permit our customers to manage their critical day-to-day business operations
through automated point-of-sale, information (content) products, inventory
management, purchasing, general accounting and customer relationship
management.
The
Company’s customer base consists of wholesale parts and tire distributors,
retailers, franchisees, cooperatives, auto service chains and single location
auto service businesses with high customer service expectations and complex
commercial relationships.
The
Company’s revenues are derived from the following:
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·
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The
sale of business management systems comprised of proprietary software
applications, implementation and training;
and
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·
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Providing
subscription-based services, including software support and maintenance,
information (content) products and online services for a
fee.
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1
CORPORATE
BACKGROUND
The
Company’s principal executive office is located at Maple Park, Maple Court,
Tankersley, Barnsley, UK S75 3DP and its phone number is
011-44-124-431-1794
In
December 2005, W3 Group, Inc. (“W3”) consummated a reverse acquisition and
changed its corporate name to Aftersoft Group, Inc. W3, which was initially
incorporated in February 1988 in Colorado, changed its state of incorporation to
Delaware in May 2003. On December 21, 2005, an Acquisition Agreement (the
“Agreement”) was consummated among W3, a separate Delaware corporation named
Aftersoft Group, Inc. (“Oldco”) and Auto Data Network, Inc. (“ADNW”) in which W3
acquired all of the issued and outstanding shares of Oldco in exchange for
issuing 32,500,000 shares of Common Stock of W3, par value $0.0001 per share, to
ADNW, which was then the sole shareholder of the Company. At the time of the
acquisition, W3 had no business operations. Concurrent with the acquisition, W3
changed its name to Aftersoft Group, Inc. and its corporate officers were
replaced. The Board of Directors of the Company appointed three additional
directors designated by ADNW to serve until the next annual election of
directors. As a result of the acquisition, the former W3 shareholders owned
1,601,167, or 4.7% of the 34,101,167 total issued and outstanding shares of
Common Stock and ADNW owned 32,500,000 or 95.3% of the Company’s Common Stock.
On December 22, 2005, Oldco changed its name to Aftersoft Software, Inc. and is
currently inactive. On April 21, 2010 shareholders approved the change of the
Company’s name to MAM Software Group Inc.
On August
26, 2006, the Company acquired 100% of the issued and outstanding shares of EXP
from ADNW in exchange for issuing 28,000,000 shares of Common Stock to ADNW with
a market value of $30,800,000. On February 1, 2007, the Company consummated an
agreement to acquire Dealer Software and Services Limited (“DSS”), a subsidiary
of EXP, in exchange for issuing 16,750,000 shares of Common Stock to ADNW with a
market value of $15,075,000.
During
2007, the Company conducted a strategic assessment of its businesses and
determined that neither EXP nor DSS fit within its long-term business model. The
Company identified a buyer for the two businesses in First London PLC (formerly
First London Securities PLC) (“First London”). First London is a UK-based
holding company for a group of businesses engaged in asset management,
investment banking, and merchant banking. First London’s shares were listed for
trading on the London Plus market, but trading is currently suspended. First
London’s areas of specialization include technology, healthcare, and resources,
and its merchant banking operations take strategic, principal positions in
businesses that fall within its areas of specialization.
2
On June
17, 2007, DSS sold all of the shares of Consolidated Software Capital Limited
(“CSC”), its wholly owned subsidiary, to RLI Limited, a company affiliated with
First London (“RLI”). The consideration for this sale consisted of a note from
RLI with a face value of $865,000. On November 12, 2007, as part of the sale of
EXP (see below), the $865,000 note was exchanged for 578,672 shares of First
London common stock having a fair value of $682,000. The transaction resulted in
a loss of $183,000 to the Company.
The
Company sold its interest in EXP and DSS, EXP’s wholly owned subsidiary, on
November 12, 2007. Pursuant to the terms of a Share Sale Agreement (the “EXP
Agreement”), EU Web Services Limited (“EU Web Services”) a subsidiary of First
London, agreed to acquire, and the Company agreed to sell, the entire issued
share capital of EXP it then owned, which amounted to 100% of EXP’s outstanding
stock.
As
consideration for the sale of EXP, including DSS, EU Web Services agreed to
issue to the Company, within 28 days of the closing, 1,980,198 Ordinary shares
(the UK equivalent of common stock), £0.01 par value, in its parent company,
First London. The Ordinary shares received by the Company had an agreed upon
fair market value of $3,000,000 at the date of issuance of such shares. The
Company recorded the shares received at $2,334,000, which represents the bid
price of the restricted securities received, and discounted the carrying value
by 11% (or $280,000) as, pursuant to the EXP Agreement, the shares could not be
sold by the Company for at least 12 months. Further, the EXP Agreement provided
that the Company receive on May 12, 2008 additional consideration in the form
of: (i) Ordinary shares in EU Web Services having a fair market value of
$2,000,000 as of the date of issuance, provided that EU Web Services is listed
and becomes quoted on a recognized trading market within six (6) months from the
date of the Agreement; or (ii) if EU Web Services does not become listed within
the time period specified, Ordinary shares in First London having a fair market
value of $2,000,000 as of May 12, 2008. As EU Web Services did not become listed
within the six-month timeframe, the Company received on August 14, 2008
1,874,414 shares in First London, which had a fair market value of $2,000,000 on
May 12, 2008.
MAM is a
former subsidiary of ADNW, a publicly traded company, the stock of which is
currently traded on the pink sheets under the symbol ADNW.PK. ADNW transferred
its software aftermarket services operating businesses to MAM and retained its
database technology, Orbit. Orbit is a system for supply and collection of data
throughout the automotive industry. To date, Orbit is still in its development
phase, and ADNW will require substantial external funding to bring the
technology to its first phase of testing and deployment.
3
On
November 24, 2008, ADNW distributed a dividend of the 71,250,000 shares of MAM
common stock that ADNW owned at such time in order to complete the
previously announced spin-off of MAM’s businesses. The dividend shares were
distributed in the form of a pro rata dividend to the holders of record as of
November 17, 2008 (the “Record Date”) of ADNW’s common and convertible preferred
stock. Each holder of record of shares of ADNW common and preferred stock as of
the close of business on the Record Date was entitled to receive 0.6864782
shares of MAM’s common stock for each share of common stock of ADNW held at such
time, and/or for each share of ADNW common stock that such holder would own,
assuming the convertible preferred stock owned on the Record Date was converted
in full. Prior to the spin-off, ADNW owned approximately 77% of MAM’s
issued and outstanding common stock. Subsequent to and as a result of the
spin-off, MAM is no longer a subsidiary of ADNW.
The
Company currently has the following wholly owned direct operating subsidiaries:
MAM Software in the UK, and ASNA in the US.
MAM
Software Group, Inc. Organization Chart
4
MAM
Software Ltd.
MAM
Software is a provider of software to the automotive aftermarket in the UK and
Ireland. MAM Software specializes in providing reliable and competitive business
management solutions to the motor factor (also known as jobber), retailing, and
wholesale distribution sectors. It also develops applications for vehicle repair
management and provides solutions to the retail and wholesale tire industry. All
MAM Software programs are based on the Microsoft Windows family of operating
systems. Each program is fully compatible with the other applications in their
range, enabling them to be combined to create a fully integrated package. MAM
Software is based in Tankersley, UK.
Aftersoft
Network N.A., Inc. (ASNA)
ASNA
develops open business management systems, and distribution channel e-commerce
systems for the automotive aftermarket supply chain. These systems are used by
leading aftermarket outlets, including tier one manufacturers, program groups,
warehouse distributors, tire and service chains and independent installers. ASNA
products and services enable companies to generate new sales, operate more cost
efficiently, accelerate inventory turns and maintain stronger relationships with
suppliers and customers. ASNA has three wholly owned subsidiaries operating
separate businesses: (i) AFS Warehouse Distribution Management, Inc. and (ii)
AFS Tire Management, Inc. which are both based in Dana Point, California, and
(iii) MAM Software, Inc., which is based in Allentown,
Pennsylvania.
ASNA
specifically focuses on selling systems to the service and tire segment of the
market, while MAM Software, Inc. focuses on the warehouse and jobber segment of
the market.
Industry
Overview
The
Company serves the business needs of customers involved in the supply of parts,
maintenance and repair of automobiles and light trucks in three key segments of
the automotive aftermarket, namely parts, tires and auto service.
The
industry is presently experiencing a level of consolidation in the lines that
are being sold. The previous distinction of having parts and tires provided by
two distinct suppliers is coming to an end, as our customers’ businesses need to
offer their clients the widest range of products and services under one roof. As
a result, what were previously parts-only stores, jobbers and warehouses, are
now taking in tire inventory as well in order to satisfy their clients’ demands,
and vice-versa. This in turn is causing owners of these businesses to evaluate
their business systems to ensure they can compete over the short, medium and
long term. An increase in the “do-it-yourself” market due to “credit crunch” is
requiring these systems, but at the same time a
need to compete strongly with other parts stores is cutting
margins as businesses attempt to attract new and return business. Longer
warranties are still deferring the length of time until newer vehicles are
entering the aftermarket, except for running spares and service parts, accident
damage, and optional add-ons such as security, entertainment, performance and
customization.
5
Continuing
market conditions related to the overall downturn in the consumer market is also
directly affecting the confidence and ability of businesses to invest in new
systems. The industry’s response to this has been to introduce incentive and
discount programs, but to date it is uncertain whether this approach will be
successful long term.
The
Company believes that growth in the automotive aftermarket will continue to be
driven by the following factors:
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·
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gradual
growth in the aggregate number of vehicles in
use;
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·
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an
increase in the average age of vehicles in
operation;
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·
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fewer
new vehicles being purchased due to uncertainty in the economy, especially
available credit;
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·
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the
total number of miles driven per vehicle per year;
and
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·
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increased
vehicle complexity.
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Products
and Services
Meeting
the needs of the automotive aftermarket requires a combination of business
management systems, information products and online services that combine to
deliver benefits for all parties involved in the timely repair of a vehicle. The
Company provides systems and services that meet these needs and help its
customers to meet their customers’ expectations. These products and services
include:
|
1.
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Business
Management Systems comprised of the Company’s proprietary software
applications, implementation and training and third-party hardware and
peripherals;
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|
2.
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Information
Products such as an accessible catalog database related to parts,
tires, labor estimates, scheduled maintenance, repair information,
technical service bulletins, pricing and product features and benefits
that are used by the different participants in the automotive
aftermarket;
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6
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3.
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Online
Services and products that provide online connectivity between
manufacturers, warehouse distributors, retailers and automotive service
providers. These products enable electronic data interchange throughout
the automotive aftermarket supply chain between the different trading
partners. They also enable procurement and business services to be
projected over the internet to an expanded business audience;
and
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|
4.
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Customer
Support, Consulting and Training that provide phone and online
support, implementation and
training.
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Business
Management Systems
MAM’s
business management systems meet the needs of warehouse distributors, part
stores and automotive service providers as follows:
Warehouse
Distributors
DirectStep . This
product is designed for and targeted at warehouse distributors that seek to
manage multiple locations and inventories on a single system. ASNA through its
subsidiary, MAM Software, Inc., provides distributors a complete business
management system for inventory management, customer maintenance, accounting,
purchasing and business analytics. The products enable online trading and
services (through ASNA’s OpenWebs product) including price and product
information updating integrated with Autopart and VAST products, which are used
by parts stores and automotive service providers.
Autopart . This is a
UK-developed product that is sold and promoted in the US by MAM Software, Inc.
This product is designed for and targeted at warehouse distributors that seek to
manage multiple locations and inventories on a single system for a regional area
and are also suited to managing single location franchisees or buying group
members. The product provides point of sale, inventory management, electronic
purchasing capabilities and a fully integrated accounting module. It also allows
the parts stores to connect with automotive service providers through our
Openwebs online services product.
Parts
Stores
Autopart . This is a
UK-developed product that is sold and promoted in the US by MAM Software, Inc.
In addition to warehouse distributors, this product is designed for and targeted
at parts store chains that seek to manage multiple locations and inventories on
a single system for a regional area and are also suited to managing single
location franchisees or buying group members. The product provides point of
sale, inventory management, electronic purchasing capabilities and a fully
integrated accounting module. It also allows the parts stores to connect with
automotive service providers through our Openwebs online services
product.
7
Automotive
Service Providers
VAST . This product
is designed for and targeted at large- to medium- sized automotive service and
tire chains that seek to manage multiple locations and inventories for a
regional area is also suited to managing single location stores that are part of
a franchise or a buying group. VAST provides point-of-sale, inventory
management, electronic purchasing and customer relationship management
capabilities. It also allows the service provider to connect with parts and
tires warehouse distributors and parts stores through either ASNA’s online
services and products or other industry connectivity solutions.
Autowork . This is a
UK-developed product that is sold by MAM Software Ltd. This product is designed
for and targeted at small single store automotive installers. The Autowork
product provides estimate, job card, parts procurement and invoice capabilities.
It also allows the automotive installer to connect with parts distributors
through the Company’s online services and products. This product has recently
been made available over the internet as a Software as a Service product (SaaS),
allowing customers to purchase the solution on a monthly basis but without the
need to manage the system. It has been launched under the name of Autowork
Online.
Autopart . This is a
UK-developed product that is sold in both the US and UK. In the US it is sold by
MAM Software, Inc. and in the UK by MAM Software Ltd. This product is designed
for and targeted at parts store chains that seek to manage multiple locations
and inventories on a single system for a regional area. It is also suited to
managing single location franchisees or buying group members. The product
provides point of sale, inventory management, electronic purchasing capabilities
and a fully integrated accounting module. An Autopart PDA module is also
available to allow field sales personnel to record sales activity in real time
on handheld devices while on the road. The PDA module also allows the sales
representative to maintain their stock and synchronize in real time while
traveling, or later, locally, with Autopart directly. It also allows parts
stores to connect with automotive service providers through the ASNA online
services, OpenWebs.
Information
Products
The
Company provides product catalog and vehicle repair information required to
enable point-of-sale transactions. These proprietary database products and
services generate recurring revenues through monthly or annual subscription
fees.
8
MAM
Software Ltd. develops and maintains proprietary information products that
differentiate its products from those of the majority of its competitors in the
UK. In the US and Canada, ASNA develops and maintains a proprietary workflow
capability that integrates information products sourced from its suppliers such
as Activant, WHI and NAPA to its automotive parts and tire customers, including
warehouse distributors, parts stores and automotive service
providers.
MAM
Software Ltd.’s principal information service is AutoCat, which is distributed
either via CDs in the form of AutoCat or via the internet as AutoCat+. Both
forms of Autocat provide access to a database of over 18
million automobile vehicle applications for the UK market.
Business systems software used by the warehouse distributor, parts store and
auto service provider enable the user to access information about parts quickly
and accurately. MAM Software Ltd. charges a monthly or annual subscription fee
for its information products. Customers are provided updates via periodic CDs in
the case of AutoCat or daily via the internet for AutoCat+. In the UK, there are
approximately 8,000 end-users who use our information products.
In
addition, information products developed or resold by ASNA include Interchange
Catalog, a database that provides cross references of original equipment
manufacturer part numbers to aftermarket manufacturer part numbers; Price
Updating, a service that provides electronic price updates following a price
change by the part manufacturer; Labor Guide, a database used by automotive
service providers to estimate labor hours for purposes of providing written
estimates of repair costs to customers; Scheduled Service Intervals, a database
of maintenance intervals; and Tire Sizing, a database that cross-references
various tire products and applications.
Online
Services
Both ASNA
and MAM Software Ltd. offer online e-commerce services in the form of
system-to-system and web browser implementations. These online services connect
the automotive aftermarket from manufacturers through warehouse distributors and
parts stores to automotive service providers for the purpose of purchasing parts
and tires, fleet and national account transaction processing and online product
price information.
OpenWebs(TM)
e-Commerce Gateway Services
In the US
and Canada, ASNA’s e-commerce gateway services use automotive industry standard
messaging specifications to deliver online services that connect the automotive
aftermarket supply chain for the purpose of purchasing parts and tires, fleet
and national account transaction processing, online product and price updating
for parts and tires.
9
OpenWebs(TM)
e-Commerce Browser Services
In the US
and Canada, ASNA’s e-commerce browser services enable warehouse distributors and
parts stores to provide an online service to automotive service providers for
the purpose of purchasing of parts and tires, accessing account information and
other browser-based channel management services.
Autonet
In the
UK, MAM Software Ltd.’s Autonet online services connect manufacturers, warehouse
distributors, parts stores and automotive service providers for the purpose of
purchasing of parts and tires, fleet and national account transaction processing
and product information and price distribution.
AutoCat+
MAM
Software Ltd.’s UK product information database is available for access and
distribution as a Web-driven service called AutoCat+ in which the database and
access software have been enhanced to enable service professionals to look up
automotive products for themselves, view diagrams and select the parts for their
vehicle. This enhanced version of the AutoCat product is used by parts stores
and the professional installer segments of the automotive parts aftermarket in
the UK.
Customer
Support and Consulting and Training
The
Company provides support, consulting and training to its customers to ensure the
successful use of its products and services. The Company believes this extra
level of commitment and service builds customer relationships, enhances customer
satisfaction and maximizes customer retention. These services consist of the
following:
|
·
|
Phone
and online support. Customers can call dedicated support lines to speak
with knowledgeable personnel who provide support and perform on-line
problem solving as required.
|
|
·
|
Implementation,
education and training consulting. Our consulting and training teams work
together to minimize the disruption to a customer’s business during the
implementation process of a new system and to maximize the customer’s
benefit from the use of the system through
training.
|
ASNA and
MAM Software Ltd. also provide a customer-only section on their intranet sites
that allows customers direct access to newsgroups, on-line documentation and
information related to products and services. New customers enter into support
agreements, and most retain such service agreements for as long as they own the
system. Monthly fees vary with the number of locations and the software modules,
information products and online services subscribed to. The agreements are
generally month-to-month agreements. The Company offers training at both ASNA
and MAM Software Ltd.’s facilities, the customer’s facilities and online for
product updates or introduce specific new capabilities.
10
MAM
Software Ltd.’s UK catalog information product and other information services
are delivered by its AutoCat team, based in Wareham, England. The AutoCat
product team sources, standardizes and formats data collected in an electronic
format from over 130 automotive parts manufacturers. MAM Software Ltd. provides
this data to its customers in either compact discs for the AutoCat product or
via the internet for the AutoCat+ product.
Distribution
There are
two primary vertical distribution channels for aftermarket parts and tire
distribution: the traditional wholesale channel and the retail
channel.
Automotive
Aftermarket Distribution Channels
|
·
|
Traditional Wholesale
Channel . The wholesale channel is the predominant distribution
channel in the automotive aftermarket. It is characterized by the
distribution of parts from the manufacturer to a warehouse distributor, to
parts stores and then to automotive service providers. Warehouse
distributors sell to automotive service providers through parts stores,
which are positioned geographically near the automotive service providers
they serve. This distribution method provides for the rapid distribution
of parts. The Company has products and services that meet the needs of the
warehouse distributors, parts stores and the automotive service
providers.
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·
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Retail Channel
. The retail channel is comprised of large specialty retailers,
small independent parts stores and regional chains that sell to
“do-it-yourself” customers. Larger specialty retailers, such as Advance
Discount Auto Parts, AutoZone, Inc., O’Reilly Automotive, Inc. and CSK
Auto Corporation carry a greater number of parts and accessories at more
attractive prices than smaller retail outlets and are gaining market
share. The business management systems used in this channel are either
custom developed by the large specialty retailers or purchased from
business systems providers by small to medium-sized businesses. The
Company has products and services that support the retail
channel.
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In
addition to these two primary channels, some aftermarket parts and tires end up
being distributed to new car dealers. The business management systems used in
this channel have unique functionality specific to new car dealerships. The
Company sells a small number of products into the auto service provider side of
car dealerships. Aftermarket wholesalers of parts and tires provide online
purchasing capabilities to some new car dealerships.
11
Product
Development
The
Company’s goal is to add value to its customers’ businesses through products and
services designed to create optimal efficiency. To accomplish this goal, the
Company’s product development strategy consists of the following three key
components:
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·
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Integrating
all of the Company’s products so that its software solutions work together
seamlessly, thereby eliminating the need to switch between
applications;
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·
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Enhancing
the Company’s current products and services to support its changing
customers needs; and
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·
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Providing
a migration path to the Company’s business management systems, reducing a
fear that many customers have that changing systems will disrupt
business.
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Sales
and Marketing
The
Company’s sales and marketing strategy is to acquire customers and retain them
by cross-selling and up-selling a range of commercially compelling business
management systems, information products and online services.
Within
the parts, tire and auto service provider segments, each division sells and
markets through a combination of field sales, inside sales, and independent
representatives. The Company seeks to partner with large customers or buying
groups and leverage their relationships with their customers or members.
Incentive pay is a significant portion of the total compensation package for all
sales representatives and sales managers. Outside sales representatives focus
primarily on identifying and selling to new customers complemented by an inside
sales focus on selling upgrades and new software applications to its installed
customer base.
The
Company’s marketing approach aims to leverage its reputation for customer
satisfaction and for delivering systems, information and services that improve a
customer’s commercial results. The goal of these initiatives is to maximize
customer retention and recurring revenues, to enhance the productivity of the
field sales team, and to create the cross-selling and up-selling opportunities
for its systems, information products and online services.
12
Research
and Development
The
Company spent approximately $3.0 million in fiscal 2010 on research and
development, with approximately $0.9 million spent by ASNA, $0.3 million by MAM
Software, Inc., and $1.8 million by MAM Software Ltd. The Company spent
approximately $2.9 million in fiscal 2009 on research and development, with
approximately $1.2 million spent by ASNA, $0.4 million by MAM Software, Inc.,
and $1.3 million by MAM Software Ltd.
Patent
and Trademark
MAM
Software holds a UK trademark for its Autonet product. The trademark is a
graphical device that is made up of text saying “Autonet Tailored Internet
Solutions for the Automotive Industry”. It was filed for registration December
8, 2001 and registration was granted August 9, 2002 under ADP number 0812875001
and is due for renewal December 8, 2011.
Customers
During
the year ended June 30, 2010 one customer accounted for 10.1% of the Company’s
total revenues. During the year ended June 30, 2009 no single customer
accounted for more than 10% of the Company’s total revenues. The Company’s top
ten customers collectively accounted for 18% of total revenues during each of
fiscal 2010 and 2009. Some of ASNA’s top customers in North America include
Autopart International, AutoZone, Monro Muffler Brake, Fountain Tire and US
AutoForce. In the UK and Irish markets, MAM Software’s top customers include
Unipart Automotive, Dingbro Ltd, Allparts Automotive and General Traffic
Service.
Competition
In the US
and Canada, ASNA competes primarily with Activant, Inc. and several smaller
software companies, including Autologue, Maddenco, Janco, ASA, Signal Software
and WHI, Inc. (formerly known as Wrenchead Inc.) that provide similar products
and services to the US automotive aftermarket. Additionally, an ongoing
competitive threat to the Company is custom developed in-house systems,
information products and online services. For example, AutoZone, Inc. and
Genuine Parts Company’s NAPA Parts Group both developed their own business
management systems and electronic automotive parts catalogs for their stores and
members, although the Company currently has a partnership agreement with each of
these companies to supply their information products through the Company’s
solutions.
13
In the US
and Canada, the Company expects to compete successfully against its competitors
using two separate and complimentary strategies. First, the Company will
continue to focus on selling and promoting the Company’s complete supply chain
solutions that provide businesses with easy integration of the Company’s
business management information systems into their existing supply chain
structures. Second, the Company will continue its strategy of working with those
businesses that already manage their own supply chains and information products
(catalogs), such as buying groups like NAPA, helping to improve and compliment
their systems with the Company’s products.
ASNA, in
the US and Canada, competes with multiple products across different market
segments, so its competitors vary by segment.
Within
the warehouse distribution segment, the Company will continue to support its
legacy system, Direct Step, a product which the Company developed many years ago
which enables large warehouses with millions of parts to locate, manage, pack
and deliver the parts with ease and efficiency. Direct Step is not a Microsoft
Windows-based technology. The Company’s existing and prospective customers are
moving towards modern solutions which integrate easily with Internet-based
transactions and interactions, and the Company believes that its AutoPart
product provides that solution. The Company has been selling AutoPart
successfully in the UK and Ireland since 2000, and feels that the success this
product in the UK and the successful installation of this product within the US
will enable the Company to promote and benefit quickly from this
product.
The tire
segment is comprised of three distinct elements: retail, wholesale and
commercial. Within the tire segment and the auto service segment, the Company
focuses on client and market requirements, which the Company believes will
enable it to offer its clients the best solution, regardless of the size of a
client’s business. By continually integrating and extending the functionality of
its solutions across the entire supply chain, the Company believes that it will
be able to offer existing and potential clients products that suit their present
and future needs. Management believes that its products will present existing
and potential clients the opportunity to move away from their older existing
systems, which may restrict their market opportunities, and will permit
integration into additional sales channels and reduce the costly maintenance of
older systems.
The auto
parts segment within the auto service space has many competitors who have
developed applications for single location auto service shops. Many of these
have been developed by parts distributors like NAPA and AutoZone. While these
applications do well in a small single location store, they are not widely
distributed in the multi-store location segment of the auto parts business. The
Company’s goal is not to pursue single store locations. Rather, it will focus on
multi-store locations for which its product VAST is highly suited. The Company
believes that this multi-store ability offers strong opportunities to beat the
competition in this area and quickly increase the Company’s customer
base.
14
The last
area that the Company plans to compete in is the e-commerce space, providing new
tools and solutions for this expanding
Internet marketplace. The goal of the
Company’s OpenWebs product is to connect both parts and tire partners together
in a real-time environment so they can perform electronic ordering, gauge
inventory levels as well as disseminate information. Within the tire segment,
the Company feels that it has a competitive advantage. The Company’s observation
has led it to believe that most tire distributors either do not have a
business-to-business solution or have developed solutions from independent
sources. While the parts segment of this market is largely tied to Activant, Inc
at this time, the Company believes that customers are looking for solutions that
simply integrate their supply chain, completely and without further
restrictions. The Company’s OpenWebs solution will allow its customers to
achieve these goals.
In the
UK, MAM Software continues to compete primarily with Activant, Inc. and several
other smaller software companies including EGO and RAMDATA. The Company feels
that it provides a range of solutions that combine proven concepts with
cutting-edge technology that are functional, effective and reliable. The Company
feels that its focus towards continuing to provide solutions that enable
business to find new efficiencies and increase existing efficiencies, as the
Company develops its own products, will provide it an advantage over the
competition. These efforts, together with strong post sales support and ongoing
in depth product and market support, will assist the Company in generating and
maintaining its position within the market.
Several
large enterprise resource planning and software companies, including Microsoft
Corporation, Oracle Corporation and SAP AG, continue to supply Enterprise
Resource Planning (“ERP”) and Supply Chain Management (“SCM”) products to medium
sized original equipment manufacturers and suppliers within the automotive
market, but to date have not focused strongly on the aftermarket. The solutions
that they have developed are mainly focused on the efficient management of the
supply chain and to date do not appear to be looking to supply systems and
solutions into the jobber and service segments of the aftermarket. However there
can be no assurance that those companies will not develop or acquire a
competitive product or service in the future.
Employees
The
Company has 164 full-time employees: 2 at MAM Software Group, Inc., 30 at ASNA,
8 at MAM Software, Inc., and 124 at MAM Software Ltd. The 2 employees in MAM
Software Group, Inc., 1 is a senior executive and 1 is an accountant. ASNA has
30 employees in the US comprised of 2 in management, 1 in sales and marketing,
10 in research and development, 15 in professional services and support and 2 in
general and administration. MAM Software, Inc has 8 employees, 1 in senior
management, 2 in sales and marketing, and 5 in research and development. MAM
Software has 124 employees in the UK comprised of 6 in management, 13 in sales
and marketing, 22 in research and development, 75 in professional services and
support and 8 in general and administration.
15
All of
the Company’s employees have executed customary confidentiality and restrictive
covenant agreements. The Company believes it has a good relationship with its
employees and is currently unaware of any key management or other personnel
looking to either retire or leave the employment of the Company. During 2008,
the Company adopted a 2007 Long Term Stock Incentive Plan, which was approved by
the Company’s Board of Directors and stockholders.
Item
1A.
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Risk
Factors
|
Our
business, financial condition and operating results are subject to a number of
risk factors, both those that are known to us and identified below and others
that may arise from time to time. These risk factors could cause our actual
results to differ materially from those suggested by forward-looking statements
in this report and elsewhere, and may adversely affect our business, financial
condition or operating results. If any of those risk factors should occur,
moreover, the trading price of our securities could decline, and investors in
our securities could lose all or part of their investment in our securities.
These risk factors should be carefully considered in evaluating our
prospects.
WE
HAVE A LIMITED OPERATING HISTORY THAT MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS AND TO PREDICT OUR FUTURE OPERATING RESULTS.
We were
known as W3 Group, Inc. and had no operations in December 2005, at which time we
engaged in a reverse acquisition; therefore, we have limited historical
operations. Two of our subsidiaries, MAM Software and AFS Tire Management, Inc.
(f/k/a CarParts Technologies, Inc.) have operated since 1984 and 1997,
respectively, as independent companies under different management until our
former parent, ADNW, acquired MAM Software in April 2003 and CarParts
Technologies, Inc. in August 2004. Since the reverse merger in December 2005, we
have been primarily engaged in organizational activities, including developing a
strategic operating plan and developing, marketing and selling our products. In
particular, we had integrated a third subsidiary as a result of the acquisition
of EXP from ADNW in August 2006, its MMI Automotive subsidiary. In February
2007, we acquired DSS from ADNW, which owned a minority interest of DCS
Automotive Limited. On November 12, 2007, we sold EXP and DSS, which was EXP’s
wholly owned subsidiary. As a result of our limited operating history, it will
be difficult to evaluate our business and predict our future operating
results.
16
WE
MAY FAIL TO ADDRESS RISKS WE FACE AS A DEVELOPING BUSINESS WHICH COULD ADVERSELY
AFFECT THE IMPLEMENTATION OF OUR BUSINESS PLAN.
We are
prone to all of the risks inherent in the establishment of any new business
venture. You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks and complications frequently encountered by
entities at our current stage of development.
To
address these risks, we must, among other things,
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·
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implement
and successfully execute our business and marketing
strategy;
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·
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continue
to develop new products and upgrade our existing
products;
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·
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respond
to industry and competitive
developments;
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attract,
retain, and motivate qualified personnel;
and
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obtain
equity and debt financing on satisfactory terms and in timely fashion in
amounts adequate to implement our business plan and meet our
obligations.
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We may
not be successful in addressing these risks. If we are unable to do so, our
business prospects, financial condition and results of operations would be
materially adversely affected.
WE
MAY FAIL TO SUCCESSFULLY DEVELOP, MARKET AND SELL OUR PRODUCTS.
To
achieve profitable operations, we, along with our subsidiaries, must continue
successfully to improve, market and sell existing products and develop, market
and sell new products. Our product development efforts may not be successful.
The development of new software products is highly uncertain and subject to a
number of significant risks. The development cycle - from inception to
installing the software for customers - can be lengthy and uncertain. The
ability to market the product is unpredictable and may cause delays. Potential
products may appear promising at early stages of development, and yet may not
reach the market for a number of reasons.
17
ADDITIONAL
ISSUANCES OF SECURITIES WILL DILUTE YOUR STOCK OWNERSHIP AND COULD AFFECT OUR
STOCK PRICE.
As of
August 31, 2010, there were 85,860,185 shares of our Common Stock issued
and outstanding and 1,792,662 Series A Preferred Shares issued and
outstanding. Our Articles of Incorporation authorize the issuance of an
aggregate of 150,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock, on such terms and at such prices as our Board of Directors may
determine. These shares are intended to provide us with the necessary
flexibility to undertake and complete plans to raise funds if and when needed.
In addition, we may pursue acquisitions that could include issuing equity,
although we have no current arrangements to do so. Any such issuances of
securities would have a dilutive effect on current ownership of MAM stock. The
market price of our Common Stock could fall in esponse to the sale or issuance
of a large number of shares, or the perception that sales of a large number of
shares could occur.
WE
MAY ENCOUNTER SIGNIFICANT FINANCIAL AND OPERATING RISKS IF WE GROW OUR BUSINESS
THROUGH ACQUISITIONS.
As part
of our growth strategy, we may seek to acquire or invest in complementary or
competitive businesses, products or technologies. The process of integrating
acquired assets into our operations may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of our business.
We may allocate a significant portion of our available working capital to
finance all or a portion of the purchase price relating to possible acquisitions
although we have no immediate plans to do so. Any future acquisition or
investment opportunity may require us to obtain additional financing to complete
the transaction. The anticipated benefits of any acquisitions may not be
realized. In addition, future acquisitions by us could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect our operating results and
financial position. Acquisitions also involve other risks, including entering
markets in which we have no or limited prior experience.
AN
INCREASE IN COMPETITION FROM OTHER SOFTWARE MANUFACTURERS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR ABILITY TO GENERATE REVENUE AND CASH FLOW.
Competition
in our industry is intense. Potential competitors in the U.S. and Europe are
numerous. Most competitors have substantially greater capital resources,
marketing experience, research and development staffs and facilities than we
have. Our competitors may be able to develop products before us or develop more
effective products or market them more effectively which would limit our ability
to generate revenue and cash flow.
18
THE
PRICES WE CHARGE FOR OUR PRODUCTS MAY DECREASE AS A RESULT OF COMPETITION AND
OUR REVENUES COULD DECREASE AS A RESULT.
We face
potential competition from very large software companies, including Microsoft
Corporation, Oracle Corporation and SAP AG which supply ERP and
SCM products to our target market of small- to medium-sized businesses
servicing the automotive aftermarket. To date we have directly competed with one
of these larger software and service companies. There can be no assurance that
these companies will not develop or acquire a competitive product or service in
the future. Our business would be dramatically affected by price pressure if
these larger software companies attempted to gain market share through the use
of highly discounted sales and extensive marketing campaigns.
IF
WE FAIL TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, OUR TECHNOLOGIES AND
PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE.
The
software industry is characterized by rapid and significant technological
change. We expect that the software needs associated with the automotive
technology will continue to develop rapidly, and our future success will depend
on our ability to develop and maintain a competitive position through
technological development.
WE
DEPEND ON PATENT AND PROPRIETARY RIGHTS TO DEVELOP AND PROTECT OUR TECHNOLOGIES
AND PRODUCTS, WHICH RIGHTS MAY NOT OFFER US SUFFICIENT PROTECTION.
The
software industry places considerable importance on obtaining patent and trade
secret protection for new technologies, products and processes. Our success will
depend on our ability to obtain and enforce protection for products that we
develop under US and foreign patent laws and other intellectual property laws,
preserve the confidentiality of our trade secrets and operate without infringing
the proprietary rights of third parties. Currently, only one of our products is
patented.
We also
rely upon trade secret protection for our confidential and proprietary
information. Others may independently develop substantially equivalent
proprietary information and techniques or gain access to our trade secrets or
disclose our technology. We may not be able to meaningfully protect our trade
secrets which could limit our ability to exclusively produce
products.
We
require our employees, consultants, and parties to collaborative agreements to
execute confidentiality agreements upon the commencement of employment or
consulting relationships or collaboration with us.
These agreements may not provide meaningful protection of our
trade secrets or adequate remedies in the event of unauthorized use or
disclosure of confidential and proprietary information.
19
IF
WE BECOME SUBJECT TO ADVERSE CLAIMS ALLEGING INFRINGEMENT OF THIRD-PARTY
PROPRIETARY RIGHTS, WE MAY INCUR UNANTICIPATED COSTS AND OUR COMPETITIVE
POSITION MAY SUFFER.
We are
subject to the risk that we are infringing on the proprietary rights of third
parties. Although we are not aware of any infringement by our technology on the
proprietary rights of others and are not currently subject to any legal
proceedings involving claimed infringements, we cannot assure you that we will
not be subject to such third-party claims, litigation or indemnity demands and
that these claims will not be successful. If a claim or indemnity demand were to
be brought against us, it could result in costly litigation or product shipment
delays or force us to stop selling such product or providing such services or to
enter into royalty or license agreements.
OUR
SOFTWARE AND INFORMATION SERVICES COULD CONTAIN DESIGN DEFECTS OR ERRORS WHICH
COULD AFFECT OUR REPUTATION, RESULT IN SIGNIFICANT COSTS TO US AND IMPAIR OUR
ABILITY TO SELL OUR PRODUCTS.
Our
software and information services are highly complex and sophisticated and
could, from time to time, contain design defects or errors. We cannot assure you
that these defects or errors will not delay the release or shipment of our
products or, if the defect or error is discovered only after customers have
received the products, that these defects or errors will not result in increased
costs, litigation, customer attrition, reduced market acceptance of our systems
and services or damage to our reputation.
IF
WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL OUR BUSINESS WILL SUFFER.
We are
highly dependent on the principal members of our management staff. We also rely
on consultants and advisors to assist us in formulating our development
strategy. Our success also depends upon retaining key management and technical
personnel, as well as our ability to continue to attract and retain additional
highly qualified personnel. We may not be successful in retaining our current
personnel or hiring and retaining qualified personnel in the future. If we lose
the services of any of our management staff or key technical personnel, or if we
fail to continue to attract qualified personnel, our ability to acquire, develop
or sell products would be adversely affected.
20
IT
MAY BE DIFFICULT FOR SHAREHOLDERS TO RECOVER AGAINST THOSE OF OUR DIRECTORS AND
OFFICERS THAT ARE NOT RESIDENTS OF THE U.S.
Two of
our directors, of whom one are also executive officers, are residents of the UK.
In addition, our significant operating subsidiary, MAM Software is located in
the UK. Were one or more shareholders to bring an action against us in the
US and succeed, either through default or on the merits, and obtain a financial
award against an officer or director of the Company, that shareholder may be
required to enforce and collect on his or her judgment in the UK, unless the
officer or director owned assets which were located in the US. Further,
shareholder efforts to bring an action in the UK against its citizens for any
alleged breach of a duty in a foreign jurisdiction may be difficult, as
prosecution of a claim in a foreign jurisdiction, and in particular a foreign
nation, is fraught with difficulty and may be effectively, if not financially,
unfeasible.
OUR
MANAGEMENT AND INTERNAL SYSTEMS MIGHT BE INADEQUATE TO HANDLE OUR POTENTIAL
GROWTH.
Our
success will depend in significant part on the expansion of our operations and
the effective management of growth. This growth will place a significant strain
on our management and information systems and resources and operational and
financial systems and resources. To manage future growth, our management must
continue to improve our operational and financial systems and expand, train,
retain and manage our employee base. Our management may not be able to manage
our growth effectively. If our systems, procedures, controls, and resources are
inadequate to support our operations, our expansion would be halted and we could
lose our opportunity to gain significant market share. Any inability to manage
growth effectively may harm our ability to institute our business
plan.
21
THE
MARKET FOR OUR COMMON STOCK IS LIMITED AND YOU MAY NOT BE ABLE TO SELL YOUR
COMMON STOCK.
Our
Common Stock is currently quoted on the Over-The-Counter Bulletin Board, and is
not traded on a national securities exchange. The market for purchases and sales
of the Company’s Common Stock is limited and therefore the sale of a relatively
small number of shares could cause the price to fall sharply. Accordingly, it
may be difficult to sell shares quickly without significantly depressing the
value of the stock. Unless we are successful in developing continued investor
interest in our stock, sales of our stock could continue to result in major
fluctuations in the price of the stock.
THE
PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE
FLUCTUATIONS.
The
market price of the securities of software companies has been especially
volatile. Thus, the market price of our Common Stock is likely to be subject to
wide fluctuations. If our revenues do not grow or grow more slowly than we
anticipate, or, if operating or capital expenditures exceed our expectations and
cannot be adjusted accordingly, or if some other event adversely affects us, the
market price of our Common Stock could decline. If the stock market in general
experiences a loss in investor confidence or otherwise fails, the market price
of our Common Stock could fall for reasons unrelated to our business, results of
operations and financial condition. The market price of our stock also might
decline in reaction to events that affect other companies in our industry even
if these events do not directly affect us.
SINCE
OUR STOCK IS CLASSIFIED AS A “PENNY STOCK,” THE RESTRICTIONS OF THE SEC’S PENNY
STOCK REGULATIONS MAY RESULT IN LESS LIQUIDITY FOR OUR STOCK.
The US
Securities and Exchange Commission (“SEC”) has adopted regulations which define
a “Penny Stock” to be any equity security that has a market price (as therein
defined) of less than $5.00 per share
or an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transactions involving a penny stock, unless
exempt, the rules require the delivery, prior to any transaction involving a
penny stock by a retail customer, of a disclosure schedule prepared by the SEC
relating to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker/dealer and the registered representative
and current quotations for the securities. Finally,
monthly statements are required to be
sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Because the
market price for our shares of common stock is less than $5.00, our securities
are classified as penny stock. As a result of the penny stock restrictions,
brokers or potential investors may be reluctant to trade in our securities,
which may result in less liquidity for our stock.
22
WE
HAVE INSURANCE COVERAGE FOR THE SERVICES WE OFFER. HOWEVER, A CLAIM FOR DAMAGES
MAY BE MADE AGAINST US REGARDLESS OF OUR RESPONSIBILITY FOR THE FAILURE, WHICH
COULD EXPOSE US TO LIABILITY.
We
provide business management solutions that we believe are critical to the
operations of our customers’ businesses and provide benefits that may be
difficult to quantify. Any failure of a customer’s system installed or of the
services offered by us could result in a claim for substantial damages against
us, regardless of our responsibility for the failure. Although we attempt to
limit our contractual liability for damages resulting from negligent acts,
errors, mistakes or omissions in rendering our services, we cannot assure you
that the limitations on liability we include in our agreements will be
enforceable in all cases, or that those limitations on liability will otherwise
protect us from liability for damages. In the event that the terms and
conditions of our contracts which limit our liability are not sufficient, we
have insurance coverage. This coverage of approximately $5,000,000 in the
aggregate in the UK and in the US insures the business for negligent acts, error
or omission, failure of the technology services to perform as intended, and
breach of warranties or representations. It also insures the services that we
supply including, web services, consulting, analysis, design, installation,
training, support, system integration, the manufacture, sale, licensing,
distribution or marketing of software, the design and development of code,
software and programming and the provision of software applications as a
service, rental or lease. However, there can be no assurance that our insurance
coverage will be adequate or that coverage will remain available at acceptable
costs. Successful claims brought against us in excess of our insurance coverage
could seriously harm our business, prospects, financial condition and results of
operations. Even if not successful, large claims against us could result in
significant legal and other costs and may be a distraction to our senior
management.
23
BECAUSE
WE HAVE INTERNATIONAL OPERATIONS, WE WILL BE SUBJECT TO RISKS OF CONDUCTING
BUSINESS IN FOREIGN COUNTRIES.
International
operations constitute a significant part of our business, and we are subject to
the risks of conducting business in foreign countries, including:
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•
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difficulty
in establishing or managing distribution
relationships;
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•
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different
standards for the development, use, packaging and marketing of our
products and technologies;
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•
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our
ability to locate qualified local employees, partners, distributors and
suppliers;
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•
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the
potential burden of complying with a variety of foreign laws and trade
standards; and
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•
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general
geopolitical risks, such as political and economic instability, changes in
diplomatic and trade relations, and foreign currency risks and
fluctuations.
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No
assurance can be given that we will be able to positively manage the risks
inherent in the conduct of our international operations or that such operations
will not have a negative impact on our overall financial
operations.
WE WERE NOT IN COMPLIANCE WITH
CERTAIN COVENANTS UNDER OUR SENIOR SECURED NOTE. WE HAVE RECEIVED WAIVERS ON
THREE OCCASIONS OF THESE EVENTS OF DEFAULT FROM THE HOLDER OF THE
NOTE.
During
the fiscal periods ended March 31, 2008, June 30, 2008 and December 31, 2008, we
violated certain covenants related to cash flow ratios under our senior secured
note with ComVest Capital LLC, dated December 21, 2007. ComVest has provided us
a waiver of these events of default on each occasion. As of March 31, 2009 and
June 30, 2009, we were in compliance with the amended loan
covenants.
As of
March 31, 2010, we failed to meet the Earnings Before Interest Depreciation and
Amortization (“EBIDA”) Ratio Covenant of 1.25:1 as required under our senior
secured note with ComVest Capital LLC, dated December 21, 2007, as amended,
which failure constitutes an event of default. The terms of the note
provide that, if any event of default occurs, the full principal amount of the
note, together with interest and other amounts owing in respect thereof to the
date of acceleration, shall become, at ComVest’s election, immediately due and
payable in cash. On June 2, 2010 ComVest charged us a fee of
$25,000 and on June 17, 2010 increased the interest rate on the Term Loan from
11% to 16% and increased the interest rate on the Revolving Credit Facility from
9.5% to 13.5%. The Company has entered into a
forbearance agreement to resolve the default with
ComVest.
24
WE
WILL NEED ADDITIONAL FINANCING OF $3,917,000 TO MAKE THE $2,917,000 BALLOON
PAYMENT DUE IN NOVEMBER 2010 ON OUR TERM LOAN AND $1,000,000 DUE ON THE
REVOLVING CREDIT FACILITY TO CONTINUE AS A GOING CONCERN, WHICH ADDITIONAL
FINANCING MAY NOT BE AVAILABLE ON A TIMELY BASIS, OR AT ALL.
We
prepared our consolidated financial statements as of June 30, 2010 on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company had an
accumulated deficit of $23.4 million and a working capital deficit of $6.7
million at June 30, 2010. These factors, along with the $4,125,000
payments due in November 2010 on our loans, raise substantial doubt about the
Company’s ability to continue as a going concern unless we are able to secure
additional funds.
We may be
required to pursue sources of additional capital to fund our operations through
various means, which may consist of equity or debt financing, including a rights
offering. Future financings through equity investments are likely to be dilutive
to existing stockholders. Also, the terms of securities we may issue in future
capital transactions may be more favorable for our new investors. Newly issued
securities may include preferences, superior voting rights and the issuance of
warrants or other derivative securities, which may have additional dilutive
effects. Further, we may incur substantial costs in pursuing future capital
and/or financing, including investment banking fees, legal fees, accounting
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which will adversely impact
our financial results.
As a
result, there can be no assurance that additional funds will be available when
needed from any source or, if available, will be available on terms that are
acceptable to us. If we are unable to raise funds to satisfy our capital needs
on a timely basis, we may be required to cease operations.
WE
MAY NOT BE ABLE OBTAIN ADDITIONAL FUNDING IF NEEDED.
Our
current operations will not generate sufficient cash flows to maintain our
current operations for the next 12 months and repay our ComVest obligations. We
are currently seeking additional funds through debt or equity
financings. Such financings may not be forthcoming. As has been widely reported,
global and domestic financial markets and economic conditions have been, and
continue to be, disrupted and volatile due to a variety of factors, including
the current weak economic conditions. As a result, the cost of
raising money in the debt and equity capital markets has increased substantially
while the availability of funds from those markets has diminished significantly,
even more so for smaller companies like ours. If such conditions and
constraints continue, we may not be able to acquire additional funds either
through credit markets or through equity markets and, even if additional
financing is available, it may not be available on terms we find
favorable. At this time, there are no anticipated sources of
additional funding in place. Failure to secured additional funding when needed
could have an adverse effect on our ability to grow.
25
WE
DO NOT INTEND TO DECLARE DIVIDENDS ON OUR COMMON STOCK.
We will
not distribute dividends to our stockholders until and unless we can develop
sufficient funds from operations to meet our ongoing needs and implement our
business plan. The time frame for that is inherently unpredictable, and you
should not plan on it occurring in the near future, if at all.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
Item
2.
|
Properties.
|
Our
corporate offices are located at Maple Park, Maple Court, Tankersley, Barnsley,
UK S75 3DP.
The main
telephone number is 0-11-44-1244-31-1794. MAM Software Group leases
approximately 400 square feet at its corporate offices and pays rent of $2,685
per quarter.
ASNA has
offices at 34052 La Plaza Drive, Suite 201, Dana Point, California 92629. The
main telephone number is 949-488-8860. ASNA has an office at 3435 Winchester Rd,
Ste 100, Allentown PA 18104 and the phone number at that office is 610-336-9045.
The California offices total approximately 3,400 square feet and are leased at
an aggregate a monthly cost of $7,672 and the Allentown, Pennsylvania office is
approximately 7,105 square feet in size and is leased for a monthly cost of
$10,214.
MAM
Software Ltd. has three offices. It has headquarters at Maple Park, Maple Court,
Tankersley, S75 3DP, UK. The phone number is 0-11-44-122-635-2900. It also has a
regional office at 15 Duncan Close, Red House Square, Moulton Park, Northampton,
NN3 6WL, UK. The phone number is 44-160-449-4001. It has second regional office
at Leanne Business Centre, Sandford Lane, Wareham, Dorset, BH20 4DY, UK. The
phone number is 44-192-955-0922. MAM Software leases approximately 11,000 square
feet at its company headquarters at a monthly cost of $17,774. It leases
approximately 1,223 square feet at its Northampton office at a monthly cost of
$1,292 and approximately 717 square feet at its Wareham office at a monthly cost
of $969.
26
Item
3.
|
Legal
Proceedings
|
As
previously reported, the Company was informed of a verdict against CarParts
Technologies, Inc. (“CarParts”) in favor of Aidan McKenna, in litigation in the
Court of Common Pleas of Allegheny County, Pennsylvania. The judgment was for
the principal amount of $3,555,000 and stems from a complaint filed by Mr.
McKenna on November 13, 2002 regarding an asset purchase transaction. That
judgment also terminated the Company’s counter-claim against Mr. McKenna
alleging breach of contract. CarParts is now known as AFS Tire Management, Inc.
(“AFS Tire”). AFS Tire is a wholly owned subsidiary of ASNA, which, in turn, is
a wholly owned subsidiary of the Company.
In a
companion case to the aforementioned action, Mr. McKenna filed a Request for
Entry of Sister State Judgment in the Superior Court of California for Orange
County seeking the enforcement of his Pennsylvania judgment against CarParts in
Orange County, California. In response, CarParts filed a Motion to Vacate Entry
of Judgment on Sister State Judgment or to Stay Enforcement of Judgment. The
hearing on that motion was set for and heard on September 7, 2006. At the
hearing, CarParts’ motion was denied.
In
September 2006, Mr. McKenna filed another action in the Court of Common Pleas of
Allegheny County, Pennsylvania. This new action seeks to enforce Mr. McKenna’s
previously described judgment against CarParts against several new entities,
including AFS Tire, AFS Warehouse Distribution Management, Inc., AFS
Autoservice, Inc., ADNW and the Company. This new action alleges that all of
these entities are liable for payment of Mr. McKenna’s judgment against
CarParts.
On August
1, 2007, the Company and Mr. McKenna entered into an agreement that settled this
outstanding matter. Pursuant to the settlement, the Company paid Mr. McKenna
$2,000,000 in cash, issued him an 8% promissory note in the principal amount of
$825,000, which is payable over 24 months, and issued Mr. McKenna 1,718,750
shares of the Company’s Common Stock, which represented $825,000 at a value of
$0.48 per share (the closing price of the Company’s Common Stock on the date of
settlement). Mr. McKenna was also entitled to warrants to purchase an equivalent
number of shares of Common Stock at the same price. Upon entering this agreement
all parties agreed to withdraw all existing litigation and claims. The Company
finalized its agreement with McKenna on September 6, 2007 and revised its
litigation accrual to $3,650,000 to reflect the settlement. The shares were
issued in August 2007 (see Notes 6, 8 and 9 to the Company’s audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K). In November 2007, the Company amended the settlement agreement and
issued 1,718,750 warrants to purchase Common Stock for $0.48 per share. The
warrants were issued to replace the Common Stock included in the settlement
agreement. In February 2009, the Company orally advised Mr. McKenna that it
would reduce the monthly payment on the note to $18,650 per
month from $37,313 per month, but there is no written amendment to the
note between the Company and Mr. McKenna. The note was paid in full
in February 2010.
27
Additionally,
the Company entered into a settlement agreement with Mr. Arthur Blumenthal. Mr.
Blumenthal’s lawsuit, “Arthur Blumenthal, et al. v. Auto Data Network, Inc., et
al.,” emanated from an agreement Mr. Blumenthal had with AFS Tire, for the
purchase of Anderson BDG, which had not been settled. The lawsuit was filed on
September 11, 2006 in the Court of Common Pleas of Chester County, West Chester,
Pennsylvania, File No. 06-07960. The Company renegotiated the agreement with Mr.
Blumenthal, the terms of which required the Company to make a payment of $50,000
cash and the issuance to Mr. Blumenthal and registration of 300,000 shares of
the Company’s Common Stock, which were issued in fiscal 2007 and valued at $0.48
per share, (the closing price of the Company’s Common Stock on the date of
settlement) or $144,000. The Company subsequently completely settled the lawsuit
with Mr. Blumenthal and repaid his notes, plus interest, totaling $957,329 in
fiscal 2008.
The
Company funded these settlements from part of the proceeds raised during a
private placement of units of Common Stock and warrants, which was completed on
July 2, 2007, and the sale of its holding in DCS Automotive Holdings
Limited.
On
February 17, 2010, Mr. Blumenthal commenced a civil action against the Company,
certain subsidiaries, and current and former officers and directors of the
Company. On April 16, 2010, the Company settled the litigation
with Mr. Blumenthal for $1,250,000. On April 19, 2010, the Company paid Mr.
Blumenthal $350,000. The balance of the settlement amount is payable
through November 2012 in equal monthly payments of $31,750, which includes
interest at 7%. In the event the Company defaults in payment, Mr. Blumenthal may
elect to reinstitute the original litigation.
Homann
Tire LTD (“Homann”) filed a complaint against the Company’s subsidiary AFS Tire
Management, Inc. (f/k/a CarParts Technologies, Inc.) in California District
Court on August 11, 2005 regarding the Company’s obligations pursuant to a
software license agreement that it had entered into with Homann on October 18,
2002. The Company believed that complaint was “without merit” as it had received
a signed system acceptance on the software and as per standard contracts, this
removes any possibility of a refund, unfortunately, the Company was not in a
financial position to pursue this case so it was felt prudent to settle the
case. The Company started to implement the system but full installation was
never completed and Homann moved to another system 6 months later. During
depositions pursuant to this case, the Company successfully negotiated a
settlement agreement with Homann on March 29, 2007. Although the maximum sum
payable under the original contract was $271,408, the Company was able to
negotiate more favorable terms. The terms of the agreement call for a settlement
payment to Homann for $150,000 as evidenced by a note payable. The note payable
bears interest at 8% per annum. Payment of $25,000 cash was made in April 2007.
The remaining balance of $125,000 was payable in April 2009, and interest on the
note payable was due in monthly installments of $833. On April 3, 2009, the
payment terms were amended to provide for repayment of the note in six monthly
installments of $21,450 each, which includes interest at 10%. The final payment
was made in September 2009.
28
The
Company is also involved in certain legal proceedings and is subject to certain
lawsuits, claims and regulations in the ordinary course of its business.
Although the ultimate effect of these matters is often difficult to predict,
management believes that their resolution will not have a material adverse
effect on the Company’s financial statements.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
On
April 21, 2010, an Annual Meeting of stockholders of the Company was held
at the offices of O2Media, Inc. 2001 West Sample Road, Suite 101, Pompano Beach,
Florida 33064.. The following items were approved by the shareholders at the
Annual Meeting:
1.
|
The
election of six (6) members of the Company’s Board of Directors, each to
serve until the next annual meeting of stockholders and until their
successors are elected and qualified or until their earlier resignation or
removal;
|
2.
|
The
ratification of the Board’s selection of KMJ Corbin & Company LLP as
the Company’s independent auditors for the fiscal year ending June 30,
2010.
|
3.
|
Name
Change
|
Following
is a summary of the votes cast at the meeting:
Votes For
|
Votes Against
|
Abstain
|
||||||||||
Election
of Michael Jamieson
|
24,457,173 | 150,689 | 0 | |||||||||
Election
of Dwight Mamanteo
|
22,499,062 | 2,108,800 | 0 | |||||||||
Election
of Marcus Wohlrab
|
24,273,401 | 334,461 | 0 | |||||||||
Election
of Frederick Wasserman
|
24,450,415 | 157,447 | 0 | |||||||||
Election
of Gerry Czarnecki
|
24,275,525 | 334,337 | 0 | |||||||||
Election
of Austin Lewis IV
|
22,315,414 | 2,292,448 | 0 | |||||||||
Name
Change
|
45,156,491 | 5,364,051 | 38,456 | |||||||||
Ratification
of KMJ Corbin & Company LLP
|
45,171,225 | 5,382,459 | 5,314 |
29
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Our
Common Stock is traded on the Over-The-Counter Bulletin Board under the symbol
“MAMS.OB.” As of June 30, 2010, there were approximately 749 shareholders of
record and 84,862,880 shares of Common Stock issued and outstanding. As of
August 31, 2010, there were approximately 747 shareholders of record and
85,860,185 shares of Common Stock issued and outstanding.
On
August 30, 2010, the bid and ask prices of our Common Stock were $0.065 and
$0.08 per share, respectively, as reported by the Over-the-Counter Bulletin
Board. The following table shows the range of high and low bids per share of our
Common Stock as reported by the Over-the-Counter Bulletin Board for the fiscal
year periods indicated. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.
2009
|
||||||||
High
|
Low
|
|||||||
1st
Quarter ended September 30
|
$ | 0.51 | $ | 0.10 | ||||
2nd
Quarter ended December 31
|
$ | 0.34 | $ | 0.07 | ||||
3rd
Quarter ended March 31
|
$ | 0.10 | $ | 0.03 | ||||
4th
Quarter ended June 30
|
$ | 0.11 | $ | 0.03 |
2010
|
||||||||
High
|
Low
|
|||||||
1st
Quarter ended September 30
|
$ | 0.14 | $ | 0.05 | ||||
2nd
Quarter ended December 31
|
$ | 0.11 | $ | 0.06 | ||||
3rd
Quarter ended March 31
|
$ | 0.09 | $ | 0.06 | ||||
4th
Quarter ended June 30
|
$ | 0.08 | $ | 0.06 |
DIVIDENDS
We have
never declared or paid dividends on our Common Stock, and our board of directors
does not intend to declare or pay any dividends on the Common Stock in the
foreseeable future. Our earnings are expected to be retained for use in
expanding our business. The declaration and payment in the future of any cash or
stock dividends on the Common Stock will be at the discretion of the board of
directors and will depend upon a variety of factors, including our future
earnings, capital requirements, financial condition and such other factors as
our board of directors may consider to be relevant from time to
time.
30
Securities
Authorized For Issuance under Equity Compensation Plans
Equity
Compensation Plan Information as of June 30, 2010
Plan Category
|
Number of
Securities to Be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
|
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
|
Number of
Securities
Remaining
Available for
Future Issuance
under the Plan
(2)
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders (1)
|
- | N/A | 12,729,432 | |||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
- | - | 12,729,432 |
(1)
|
Represents
the shares authorized for issuance under the Aftersoft Group, Inc. 2007
Long-Term Incentive Plan, which was approved by the Company’s shareholders
at the Annual Meeting held on June 12, 2008. The maximum aggregate number
of shares of Common Stock that may be issued under the Plan, including
Stock Options, Stock Awards, and Stock Appreciation Rights is limited to
15% of the shares of Common Stock outstanding on the first trading day of
any fiscal year, or 12,729,432 for fiscal
2011.
|
(2)
|
As
of July 1, 2010.
|
Recent
Sales of Unregistered Securities
On
April 6, 2010, the Company issued 186,407 shares of common stock to certain
directors in lieu of cash compensation fees, which were valued at approximately
$14,900.
31
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Some
of the statements contained in this Annual Report on Form 10-K, which are not
purely historical, may contain forward-looking statements including, but not
limited to, statements regarding the Company’s objectives, expectations, hopes,
beliefs, intentions or strategies regarding the future. In some cases, you can
identify forward-looking statements by the use of the words “may,” “will,”
“should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, our actual results could differ
materially from those disclosed in these statements due to various risk factors
and uncertainties affecting our business, including those detailed in the “Risk
Factors” section. We caution you not to place undue reliance on these
forward-looking statements. We do not intend to update any of the
forward-looking statements after the date of this report to conform them to
actual results. You should read the following discussion in conjunction with our
financial statements and related notes included elsewhere in this
report.
Critical
Accounting Policies
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis of making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
32
Available-for-Sale
Investments
Management
determines the appropriate classification of such securities at the time of
purchase and re-evaluates such classification as of each balance sheet date.
Restricted securities are valued at the quoted market bid price and discounted
for the required holding period until the securities can be liquidated. We
classify our marketable securities as available-for-sale. Marketable securities
consist of equity securities. The specific identification method is used to
determine the cost basis of securities disposed of. Available-for-sale
securities with quoted market prices are adjusted to their fair value. Any
change in fair value during the period is excluded from earnings and recorded,
net of tax, as a component of accumulated other comprehensive income (loss). Any
decline in value of available-for-sale securities below cost that is considered
to be “other than temporary” is recorded as a reduction of the cost basis of the
security and is included in the statement of operations as an impairment
loss.
Fair
Value of Measurements
The
Company’s financial instruments consist principally of cash and cash
equivalents, investments in available-for-sale securities, accounts receivable,
accounts payable, accrued expenses and debt instruments.
Financial
assets and liabilities that are remeasured and reported at fair value at each
reporting period are classified and disclosed in one of the following three
categories:
|
·
|
Level 1 – Fair value based on
quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level 2 – Fair value based on
significant directly observable data (other than Level 1 quoted prices) or
significant indirectly observable data through corroboration with
observable market data. Inputs would normally be (i) quoted prices in
active markets for similar assets or liabilities, (ii) quoted prices in
inactive markets for identical or similar assets or liabilities or (iii)
information derived from or corroborated by observable market
data.
|
|
·
|
Level 3 – Fair value based on
prices or valuation techniques that require significant unobservable data
inputs. Inputs would normally be a reporting entity’s own data and
judgments about assumptions that market participants would use in pricing
the asset or
liability.
|
33
Effective
July 1, 2009, the Company adopted the accounting standard that provides
guidance for determining whether an equity-linked financial instrument, or
embedded feature, is indexed to an entity’s own stock. The standard
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative, and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of the adoption, 5,083,333 of the Company’s issued and outstanding common
stock purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment. These warrants
have an average exercise price of $0.21 and expiration dates of December 31,
2013. In addition, amounts related to the embedded conversion feature of
convertible notes issued previously treated as equity pursuant to the derivative
treatment exemption were also no longer afforded equity treatment. As such,
effective July 1, 2009, the Company reclassified the fair value of these common
stock purchase warrants and recorded the fair value of the embedded conversion
features, which both have exercise price reset features, from equity to
liability status as if these warrants and embedded conversion features were
treated as a derivative liability since the earliest date of issue in December
2007. On July 1, 2009, the Company reclassified from additional paid-in
capital, as a cumulative effect adjustment, approximately $868,000 to derivative
liabilities, increased the debt discount and derivative liabilities by a gross
amount of approximately $310,000, decreased accumulated deficit by approximately
$619,000 for the change in fair value of derivative liabilities for the period
from December 2007 through June 30, 2009 and increased accumulated deficit by
approximately $158,000 for additional amortization of debt discount for the
period from December 2007 through June 30, 2009. The fair value of the common
stock purchase warrants was approximately $291,000 and the embedded conversion
feature was approximately $0 on June 30, 2010. The total value of
these derivative liabilities declined from $558,000 to $291,000 for the year
ended June 30, 2010. As such, the Company recognized approximately $267,000
gain from the change in fair value of the derivative liabilities for the year
ended June 30, 2010.
All
future changes in the fair value of these warrants and embedded conversion
features will be recognized in earnings until such time as the warrants are
exercised or expire and the debt is converted to common stock or repaid. These
common stock purchase warrants and conversion feature do not trade in an active
securities market, and as such, the Company estimates the fair value of these
warrants and conversion feature using the Black-Scholes option pricing model.
The assumptions used to estimate the fair value of the derivative liability at
June 20, 2010 and July 1, 2009 are as follows:
Allowance
for Doubtful Accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The allowance for
doubtful accounts is based on specific identification of customer accounts and
our best estimate of the likelihood of potential loss, taking into account such
factors as the financial condition and payment history of major customers. We
evaluate the collectibility of our receivables at least quarterly. The allowance
for doubtful accounts is subject to estimates based on the historical actual
costs of bad debt experienced, total accounts receivable amounts, age of
accounts receivable and any knowledge of the customers’ ability or inability to
pay outstanding balances. If the financial condition of our customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required. The differences could be material and
could significantly impact cash flows from operating
activities.
34
Software
Development Costs
Costs
incurred to develop computer software products to be sold or otherwise marketed
are charged to expense until technological feasibility of the product has been
established. Once technological feasibility has been established, computer
software development costs (consisting primarily of internal labor costs) are
capitalized and reported at the lower of amortized cost or estimated realizable
value. Purchased software development is recorded at its estimated fair market
value. When a product is ready for general release, its capitalized costs are
amortized using the straight-line method over a period of three years. If the
future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact our recorded net income/loss.
Goodwill
Goodwill
and intangible assets that have indefinite useful lives not be amortized but
rather be tested at least annually for impairment, and intangible assets that
have finite useful lives be amortized over their useful lives. In addition, SFAS
142 expands the disclosure requirements about goodwill. Goodwill will be subject
to impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments we
report. An impairment loss will be recorded for any goodwill that is determined
to be impaired. We perform impairment testing on all existing goodwill at least
annually. If the actual fair value of the reporting unit is less than estimated,
impairment of the related goodwill could occur, which could significantly impact
our recorded net income/loss.
Long-Lived
Assets
Our
management assesses the recoverability of long-lived assets by determining
whether the depreciation and amortization of long-lived assets over their
remaining lives can be recovered through projected undiscounted future cash
flows. The amount of long-lived asset impairment, if any, is measured based on
fair value and is charged to operations in the period in which long-lived asset
impairment is determined by management. If the actual fair value of the
long-lived assets are less than estimated, impairment of the related asset could
occur, which could significantly impact the recorded net income/loss of the
Company.
Revenue
Recognition
Software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectibility is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met. We account for delivered elements in accordance with the residual method
when arrangements include multiple product components or other elements and
vendor-specific objective evidence exists for the value of all undelivered
elements. Revenues on undelivered elements are recognized once delivery is
complete.
35
In those
instances where arrangements include significant customization, contractual
milestones, acceptance criteria or other contingencies (which represents the
majority of our arrangements), we account for the arrangements using contract
accounting, as follows:
|
1.
|
When
customer acceptance can be estimated, expenditures are capitalized as work
in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
|
|
2.
|
When
customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is
obtained.
|
We record
amounts billed to customers in excess of recognizable revenue as customer
advances and deferred revenue in the accompanying consolidated balance
sheets.
Revenues
for maintenance agreements, software support, on-line services and information
products are recognized ratably over the terms of the related service
agreements.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the enactment occurs.
Deferred taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The
Company’s practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had no accrual for interest or
penalties on the Company’s consolidated balance sheets at June 30, 2010 and
2009, and has not recognized interest and/or penalties in the consolidated
statements of operations for the years ended June 30, 2010 and
2009.
36
Overview
MAM
Software Group Inc. is a company that operates through two wholly owned
subsidiaries based in the US (ASNA) and the UK (MAM), which operate
independently of one another. We market and develop business management software
solutions that manage both the business and supply chain for small and
medium-sized firms in the automotive aftermarket. The automotive aftermarket
includes those businesses that supply servicing, parts, oil, tires, and
performance extras to the retail market.
Management
believes that the largest single issue facing the automotive aftermarket at this
time is the downturn of the global economy, especially the economies in which we
operate. The constraint of credit within the U.S. and U.K. markets is forcing
automobile owners to retain their existing automobiles far longer than they may
have previously planned. This is forcing owners to seek out more economic ways
of maintaining their vehicles, and management believes this presents an
opportunity to the Company. The need for consumers to maintain their vehicles
longer requires service suppliers to offer a wide range of services at highly
competitive prices. Management believes that this can be achieved only by those
businesses that are able to efficiently manage their businesses and find methods
to reduce costs without affecting service levels, which may best be done through
investments in ‘up to date’ management information systems, specifically those
designed for the automotive market. However, management also has recently
noticed that some businesses wishing to invest in new management systems are
also finding their access to credit reduced. This may have a detrimental effect
on our revenues if customers are unable to fund purchases. Management
still believes that the aftermarket landscape
will
continue to change over the next 18 months, with the convergence of the
aftermarket and tire markets, but this rate of change maybe slower than first
expected. Management still believes that the desire of parts manufacturers to
produce and control their own product catalogues, rather than allowing this
information to be made available by third-party catalog suppliers, will present
opportunities to the Company.
Our
revenue and income is derived primarily from the sale of software, services and
support, although in the UK we also earn a percentage of our revenue and income
from the sale of hardware systems to clients. During the fiscal year ended June
30, 2010, we generated revenues of $24,156,000 and recorded
an operating profit of $1,111,000; 73% of our revenues come from the
UK market and 27% in the US market, during our 2010 fiscal year.
In 2009,
our revenue and income is derived primarily from the sale of software, services
and support, although in the UK we also earn a percentage of our revenue and
income from the sale of hardware systems to clients. During the fiscal year
ended June 30, 2009, we generated revenues of $21,119,000 and
incurred operating loss of $181,000; 71% of our revenues come from
the UK market and 29% from the US market, during our 2009 fiscal
year.
37
Our
corporate headquarters is located in Tankersley, Barnsley, UK with additional
offices for the US operating subsidiary in Dana Point, California, and
Allentown, Pennsylvania, and, for the UK operating subsidiary, in , Northampton
and Wareham in the UK.
The
software that we sell is mainly based on a Microsoft Windows-based technology
although we do still have an older ‘Green Screen’ terminal-based product. The
four main products that we sell in the US each relate to a specific component of
the automotive aftermarket supply chain, including warehouse distribution, the
jobber, the installer and ecommerce. We sell our Direct Step product into the
warehouse segment, which enables large warehouses with millions of parts to
locate, manage, pack and deliver the parts with ease and efficiency. We sell our
Autopart product into the jobber segment, which manages a jobber’s entire
business (i.e., financial, stock control and order management) but more
important, enables the jobber quickly to identify the parts that his client
needs, either via the internet or telephone, so that the correct product for the
vehicle on the ramp can be supplied. We sell our VAST product into the
installer, segment, which repairs and maintains automobiles in addition to tire
service. The installer needs systems that enable it to efficiently and simply
manage its businesses, whether as a single entity or national multi-site
franchise. The fourth and final segment is ecommerce. This technology allows
these three separate business solutions to connect to each other and/or other
3rd party systems to allow, among other processes, ordering, invoicing and stock
checking to take place in real-time both up and down the supply chain. The UK
market differs from that of the US in that it does not have the same number of
large warehouse distribution centers, so we do not sell the Direct Step product
in the UK. We continue to sell the Autopart product to the jobber market, but
sell Autowork and Autocat+ to the installer market.
To date,
management has identified four areas that it believes we need to focus on. The
first area is the release of one of our U.K. products developed by MAM, our U.K.
subsidiary, under a Software as a Service (SaaS) model. This is where software
solutions are made available to end-users via the internet and does not require
them to purchase the software
directly but ‘rent’ it over a fixed period of time. Management believes that
this will be a rapidly growing market for the U.K. as businesses continue to
look for ways of reducing capital expenditures while maintaining levels of
service. Once this has been successfully deployed in the U.K. we will look to
use a similar model in the U.S.
The
second area of focus is the sales and marketing strategy within the U.S. market.
To date, although increased resources have been made available for sales and
marketing, they have not brought the levels of return that management had
expected. Management has reviewed the U.S. business’ sales processes and
marketing efforts and made what it feels are significant improvements that will
be successful over the next twelve months. However, management still recognizes
that if it is unable to recruit, train and deploy suitably capable personnel
within the market, the business’ products will be undervalued and its market
potential will not be reached.
38
The third
area of focus relates to the continued sales and market initiatives tied to the
Autopart product within the U.S. market. A senior member of the U.K. management
team has been
appointed to join the U.S. business to head the efforts relating to this product
along with a complementary DirectStep product. To date this move has proved
successful, as we have increased levels of service and knowledge of our U.S.
staff members, and management believes that this will continue to lead to
significant revenue increases within the next twelve months. While
management believes that this is the correct route to follow, it is aware that
this effort and the move of personnel may affect the U.K. business following the
transfer of a key member of former U.K. management.
The
fourth area is other English-speaking markets in auto industry aftermarkets as
opposed to focusing on additional vertical markets that share common
characteristics to that of the automotive market. Management intends
to carefully monitor this expansion as a result of the current state of the
global economy.
Former
Subsidiaries
On
November 12, 2007, we divested all of our shares in EXP. Pursuant to the terms
of a Share Sale EXP Agreement (the “EXP Agreement”), EU Web Services Limited
(“EU Web Services”) agreed to acquire, and we agreed to sell, the entire issued
share capital of EXP we then owned.
As
consideration for the sale of EXP, EU Web Services agreed to issue to us, within
28 days of the closing, ordinary shares, 0.01 GBP par value, in its parent
company, having a fair market value of $3,000,000 at the date of issuance of
such shares. We recorded the shares received at $2,334,000, which
represents the bid price of the restricted securities received, and discounted
the carrying value by 11% (or $280,000) as the shares could not be liquidated
for at least 12 months. Further, the EXP Agreement provided that we receive
additional consideration in the form of: (i) Ordinary shares in EU Web
Services having a fair market value of $2,000,000 as of the date of
issuance, provided that EU Web Services is listed and becomes quoted on a
recognized trading market within six (6) months from the date of the EXP
Agreement; or (ii) if EU Web Services does not become listed within the time
period specified, Ordinary shares in EU Web Services’ parent company having a
fair market value of $2,000,000 as of the date of issuance.
On June
17, 2007, DSS sold all of the shares of Consolidated Software Capital Limited
(“CSC”), its wholly owned subsidiary, for a note receivable of $865,000. On
November 12, 2007, as part of the sale of EXP, the $865,000 note receivable was
exchanged for EU Web Services’ parent company common stock having a fair value
of $682,000. The transaction resulted in a loss to us of $183,000.
Impact
of Currency Exchange Rate
Our net
revenue derived from sales in currencies other than the U.S. dollar was 73% and
71% for the year ended June 30, 2010 and June 30, 2009,
respectively. As the US dollar strengthens in relation to the
Great Britain Pound (“GBP”), as it has recently done, our revenue and income,
which is reported in US dollars, is negatively impacted. Changes in
the currency values occur regularly and in some instances may have a significant
effect on our results of operations.
39
Income
and expenses of our MAM subsidiary are translated at the average exchange
rate. The exchange rate for MAM’s operating results was
US$1.5823 per GBP for the year ended June 30, 2010, compared with US$1.6159
per GBP for the year ended June 30, 2009.
Assets
and liabilities of our MAM subsidiary are translated into US dollars at the
period-end exchange rates. The exchange rate used for translating our
MAM subsidiary was US$1.5071 per GBP at June 30, 2010 and US$1.6520 per GBP
at June 30, 2009.
Currency
translation (loss) and gain adjustments are accumulated as a separate component
of stockholders’ equity, which totaled ($786,000) and ($482,000) as of June 30,
2010 and 2009, respectively.
Backlog
As of
June 30, 2010, we had a backlog of unfilled orders of business management
systems of $3,200,000, compared to a backlog of $3,424,000 at June 30,
2009. We expect to fill approximately 65% of such backlog during the
next six months.
Results
of Operations
Our
results of operations for the fiscal year ended June 30, 2010 compared with the
year ended June 30, 2009 were as follows:
Revenues. Revenues increased
$3,037,000 or 14% to $24,156,000 for the year ended June 30, 2010, compared with
$21,119,000 for the year ended June 30, 2009. Revenue increased
1,856,000GBP from organic sales growth in data services and support including an
increase of 943,000GBP from a one time special project in our UK operations.
Revenue in our UK business was 11,174,000GBP for the year ended June 30,
2010 as compared to 9,318,000GBP for the year ended June 30, 2009
The
stronger US dollar resulted in dollar denominated revenue of $17,681,000 during
2010 as compared to $15,048,000 during 2009, which is an increase of
$2,633,000. US revenue increased $404,000 to $6,475,000 in 2010 from
$6,071,000 in 2009 because of increased sales of
software.
Cost of Revenues. Total cost
of revenues increased $778,000 or 8% to $10,274,000 for the year ended June 30,
2010, compared with $9,496,000 for the same period of June 30, 2009. Cost of
revenue as a percentage of revenue decreased slightly from 45% for the year
ended June 30, 2009 to 43% for the year ended June 30, 2010. The reduction in
cost of revenues was the result of an increased percentage of higher margin
sales. MAM Software Ltd.’s expenses increased 488,000GBP or 12%
in 2010, to 4,602,000GBP from 4,114,000GBP for 2009 because of
increased costs resulting from increased revenue.
40
UK
expenses reported in US dollars increased $633,000 or 10%.
The US expenses increased $145,000 to $2,992,000 from $2,847,000 in
2009, which was in line with the increased US revenues. As a result of ongoing
cost-cutting initiatives, we have been able to minimize any increase in the cost
of sales after a thorough review of operations throughout the Company, but
focused primarily on the US operations, which revealed discretionary items that
were capable of being reduced or eliminated without sacrificing revenue.
Included in such items were the elimination or reduction of cost and expenses
such as travel for sales personnel that was not directly related to new business
development or closing a sale; reduction of non-performing sales staff from the
US payroll; and outsourcing of software development work where
feasible.
Operating Expenses. The
following tables set forth, for the periods indicated, our operating expenses
and the variance thereof:
For the Twelve Months Ended
June 30,
|
||||||||||||||||
2010
|
2009
|
$ Variance
|
% Variance
|
|||||||||||||
Research
and development
|
$
|
3,012,000
|
$
|
2,860,000
|
$
|
152,000
|
5.3
|
%
|
||||||||
Sales
and marketing
|
2,181,000
|
2,211,000
|
(30,000
|
)
|
(1.4
|
)%
|
||||||||||
General
and administrative
|
6,462,000
|
5,651,000
|
811,000
|
14.4
|
%
|
|||||||||||
Depreciation
and amortization
|
1,116,000
|
1,082,000
|
34,000
|
3.1
|
%
|
|||||||||||
Impairment
of goodwill
|
-
|
850,000
|
(850,000
|
)
|
(100.0
|
)%
|
||||||||||
Total
Operating Expenses
|
$
|
12,771,000
|
$
|
12,654,000
|
$
|
117,000
|
0.9
|
%
|
Operating
expenses decreased by $117,000 or 0.9% for the year ended June 30, 2010 compared
with the year ended June 30, 2009. This is due to the following:
Research and Development Expenses.
Research and development expenses increased $152,000 or 5.3%
for the year ended June 30, 2010, when compared with the previous fiscal year.
This increase was due to an increase in engineering personnel and related costs
of $421,000 in the UK business which was the result of increased revenue. The US
business experienced a decrease of $269,000 due to a and a reduction in
engineering staff and related costs.
Sales and Marketing Expenses.
Sales and marketing expenses decreased by $30,000 or 1.4% for the year
ended June 30, 2010 compared with the year ended June 30, 2009. The US business
experienced a net decrease in expenses of $163,000 from a reduction in sales
personnel which more than offset additional costs associated with increased
salaries in the UK operation.
41
General and Administrative Expenses.
General and administrative expenses increased by $811,000 or 14.4% to
$6,462,000 for the year ended June 30, 2010 as compared to $5,651,000
for the same period in 2009. The increased expenses were
primarily the result of a litigation settlement expense of $533,000 and the
associated legal fees of $271,000.
In an
effort to conserve cash, we have and continue to reduce costs within our US
operations and have implemented reporting systems and controls to better manage
the US business. Should our cost-cutting efforts not be successful or in the
event that our revenue decreases in the future, we may need to seek additional
debt or equity financing. Any inability to obtain additional financing, if
required, or an inability to obtain additional financing on favorable terms,
would have a material adverse effect on our ability to implement our business
plan.
Depreciation and Amortization
Expenses. Depreciation and amortization expenses increased by $34,000 for
the year ended June 30, 2010 as compared with the same period in
2009. This increase is almost entirely due to increased
amortization from the UK operation from the introduction of two new
products.
Goodwill Impairment.
Following operating losses at ASNA during fiscal 2009
and after an analysis of goodwill at ASNA, management recognized an impairment
of $850,000 in 2009. There is no impairment in
2010.
Interest Expense. Interest
expense decreased by $241,000 to $1,361,000 for the year ended June 30, 2010.
The decrease in interest expense is primarily related to our interest
associated with our loan from ComVest Capital LLC, which the Company started to
repay in February 2010, This loan was outstanding for the full year in
2009. We accrued interest under the ComVest loan of $694,000.
The remaining ComVest interest of $513,000 was accounted for in amortization of
debt discount and debt issuance costs, which are included in interest expense.
On June 2, 2010, ComVest charge the Company a forbearance fee of $25,000. Other
smaller loans were repaid during the year resulting in additional reduced
interest expense.
Other Income (Expenses). Other
income for the year ended June 30, 2010 included an adjustment for the change in
fair value of derivative liabilities of $267,000 and a gain on settlement of
liabilities of $50,000. The results for 2009, included a write down of
$4,723,000 in Available–for
–Sale Securities.
Income Taxes. Income taxes
increased $308,000 to $694,000 for the year ended June 30,
2010 as compared to $386,000 for the year ended June 30, 2009. This increase was
the result of increased profits at MAM Software Ltd.
Net Loss. We realized a net
loss of $627,000 for the year ended June 30, 2010 compared with a net loss of
$7,623,000 for the year ended June 30, 2009.
42
Liquidity
and Capital Resources
To date,
most of our profits have been generated in Europe, but with the introduction of
new products and efforts to streamline U.S. operations, we expect to see an
increase in overall revenues with a contribution from U.S. operations in fiscal
2011.
During
the year ended June 30, 2010 we repaid approximately $1,017,000 on our ComVest
Loan, $116,000 on our secured notes and $213,000 on our unsecured
obligations. We also made payments of $399,000 for the
settlement of litigation. These payment were made from cash flow
generated from operations.
As of
June 30, 2010 we owe ComVest Capital $4,983,000 and are repaying $208,000 per
month until November 2010 when the balance is due.
The
Company expects to generate positive cash flow from operations for 2011, but it
will not be sufficient to repay the ComVest debt in November
2010. The Company is currently seeking equity financing and a new
debt facility to repay the ComVest Loans in November 2010. There can
be no assurance that such financing will be available on acceptable terms, in a
timely fashion or even at all.
As a
result, there is substantial doubt about the Company’s ability to continue as a
going concern unless we are able to secure additional funds. We have
prepared our consolidated financial statements in this Form 10-K on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
If we are
able to refinance our ComVest debt with favorable terms, we believe that our
liquidity will improve throughout our fiscal year ending June 30, 2011. We
believe that this improvement will be a result of our ongoing cost-cutting
initiatives in the US coupled with a continued improved sales picture in our US
operation. Notwithstanding the improved outlook as a result of our internal
initiatives, we remain guarded in our optimism given the weakness in the US
economy, which, should it affect buying decisions of our target market, will
impact our liquidity through reduced sales in the US.
During
the year ended June 30, 2010, we had material commitments for capital
expenditures of $151,000. The purposes of these capital expenditures were for
the purchase of property and equipment for $85,000 and the development of
software products of $66,000. During the course of the next twelve months, we
expect that our capital needs will remain constant. We do not anticipate any off
balance sheet financing arrangements and expect to maintain our current ratio of
debt to equity.
We
believe that we have addressed all liabilities of ADNW that we are required to
assume and see no prospects that we will need to be responsible for any further
liabilities of ADNW. We believe that the combination of streamlined operations
in the US coupled with no further responsibility for liabilities of ADNW will
enable us to generate cash flow from operations for the next twelve
months.
43
ComVest
Capital LLC Loan Agreement
On
December 21, 2007, we entered into a Revolving Credit and Term Loan Agreement
(the “Loan Agreement”) with ComVest Capital LLC (“ComVest”), as lender, pursuant
to which ComVest agreed to extend to us a $1,000,000 secured revolving Credit
Facility and a $5,000,000 Term Loan.
Credit
Facility and Revolving Credit Note. Pursuant to the terms of the Loan Agreement,
the Credit Facility is available to us through November 30, 2009, unless the
maturity date is extended, or we prepay the Term Loan (described below) in full,
in each case in accordance with the terms of the Loan Agreement. The Credit
Facility provides for borrowing capacity of
an amount up to (at any time
outstanding) the lesser of the Borrowing Base
at the time of each advance under the Credit Facility, or $1,000,000. The
borrowing base at any time will be an amount determined in accordance with a
borrowing base report we are required to provide to the lender, based upon our
Eligible Accounts and Eligible Inventory, as such terms are defined in the Loan
Agreement. The Loan Agreement provides for advances to be limited to
(i) 80% of Eligible Accounts plus, in ComVest’s sole discretion, (ii) 40% of
Eligible Inventory, minus (iii) such reserves as ComVest may establish from time
to time in its discretion. As of June 30, 2009, the borrowing base
was $1,385,000.
In
connection with the Credit Facility, we issued a Revolving Credit Note (the
“Credit Note”) on December 21, 2007 payable to ComVest in the principal amount
of $1,000,000, initially bearing interest at a rate per annum equal to the
greater of (a) the prime rate, as announced by Citibank, N.A. from time to time,
plus two percent (2%), or (b) nine and one-half percent (9.5%). The applicable
interest rate will be increased by four hundred (400) basis points during the
continuance of any event of default under the Loan Agreement. Interest is
computed on the daily unpaid principal balance and is payable monthly in
arrears on the first day of each calendar month commencing
January 1, 2008. Interest is also payable upon maturity or
acceleration of the Credit Note. On February 10, 2009, the interest
rate was increased from 9.5% to 11% in connection with a waiver we received for
violating one of our debt covenants at December 31,
2008.
As of
March 31, 2010, the Company did not meet the EBIDA Ratio Covenant of 1.25:1 as
required by the Loan Agreement, and Amendment. Our
failure to maintain this ratio constitutes an event of default under the
terms of the Loan Agreement. Under the terms of the Loan Agreement, if any event
of default occurs, the full principal amount of the Note, together with interest
and other amounts owing in respect thereof, to the date of acceleration shall
become, at ComVest’s election, immediately due and payable in cash On June 2,
2010, the Company paid ComVest a Forbearance Fee of $25,000 to waive the default
until June 20, 2010 and on June 17, 2010 ComVest raised the interest rate from
9.5% to 13.5%.
44
As of
June 30, 2010, the Company did not meet the EBIDA Ratio Covenant of 1.25:1 as
required by the Loan Agreement, and Amendment. Our
failure to maintain this ratio constitutes an event of default under the
terms of the Loan Agreement. Under the terms of the Loan Agreement, if any event
of default occurs, the full principal amount of the Note, together with interest
and other amounts owing in respect thereof, to the date of acceleration shall
become, at ComVest’s election, immediately due and payable in cash. The
Company has entered into a forbearance agreement to resolve the default with
ComVest.
We have
the right to prepay all or a portion of the principal balance on the Credit Note
at any time, upon written notice, with no penalty. The Credit Note is secured
pursuant to the provisions of certain Security Documents which we entered into
on the same date.
We
have the right, at our option, and provided that the maturity date of the Credit
Facility has not been accelerated due to our prepayment in full of the Term
Loan, to elect to extend the Credit Facility for one additional year, through
November 30, 2010, upon written notice to ComVest, provided that no default or
event of default has occurred and is continuing at that time. We also have the
option to terminate the Credit Facility at any time upon five business days’
prior written notice, and upon payment to ComVest of all outstanding principal
and accrued interest of the advances on the Credit Facility, and prorated
accrued commitment fees. The Credit Facility commitment also terminates, and all
obligations become immediately due and payable, upon the consummation of a Sale,
which is defined in the Loan Agreement as certain changes of control or sale or
transfers of a material portion of our assets.
During
our fourth fiscal quarter of 2008, we drew down $500,000 of the Credit Facility,
and drew down the remaining $500,000 during the first and second fiscal quarter
of 2009. As a result, as of June 30, 2009, the outstanding principal
due on the credit facility was $1,000,000, and as of June 30, 2009, the entire
credit facility had been drawn down. As of June 30, 2009, we have not
yet repaid any principal. As of June 30, 2009, this loan bore
interest at a rate of 9.5%. During fiscal 2008, we paid $2,045 in
interest payments, and during fiscal 2009, we paid $117,281 including fees of
$27,000.
Term Loan
and Convertible Term Note. In addition to the Credit Facility,
ComVest extended us a Term Loan, evidenced by a Convertible Term Note (the “Term
Note”) we issued on December 21, 2007 in the principal amount of $5,000,000. The
Term Loan was a one-time loan, and unlike the Credit Facility, the principal
amount is not available for re-borrowing. The Term Note bears
interest at a rate of eleven percent (11%) per annum, except that during the
continuance of any event of default, the interest rate will be increased to
sixteen percent (16%).
45
Initially,
the Term Note was payable in 23 equal monthly installments of $208,333.33 each,
payable on first day of each calendar month commencing January 1, 2009, through
November 1, 2010, with the balance due on November 30, 2010. The
payment schedule was subsequently modified, and was delayed for one year so that
payments will commence on January 1, 2010, pursuant to an amendment of the Loan
Agreement during the quarter ended June 30, 2008 (see below).
We have
the option to prepay the principal balance of the Term Note in whole or in part,
at any
time, upon 15 days’ prior written notice. We will be required to prepay the Term
Loan in whole or part under certain circumstances. In the event that we prepay
all or a portion of the Term Loan, we will ordinarily pay a prepayment premium
in an amount equal to (i) three percent (3%) of the principal amount being
prepaid if such prepayment is made or is required to be made on or prior to the
second anniversary of the Closing Date, and (ii) one percent (1%) of the
principal amount being prepaid if such prepayment is made or is required to be
made after December 21, 2009.
The
number of shares issuable upon conversion of the Term Note and the conversion
price may be proportionately adjusted in the event of any stock dividend,
distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar transaction. In
addition, the number of conversion shares, and/or the conversion price may be
adjusted in the event of certain sales or issuances of shares of our common
stock, or securities entitling any person to acquire shares of common stock, at
any time while the Term Note is outstanding, at an effective price per share
which is less than the then-effective conversion price of the Term Note.
The principal and interest payable on the Term Note was initially convertible
into shares of our common stock at the option of ComVest, at an initial
conversion price of $1.50 per share. On July 3, 2008, the conversion price was
reduced to approximately $1.49 per share following our subsequent issuance of
shares of common stock and warrants at an effectively lower
price. Consequently, the number of shares issuable upon conversion of
the principal amount of the Term Note was increased to 3,361,345 shares from
3,333,333 shares. We also may require conversion of the principal and interest
under certain circumstances.
The Term
Loan is evidenced by a Convertible Term Note (the “Term Note”) issued by the
Company on the Closing Date, and payable to ComVest in the principal amount of
$5,000,000. The Term Note bears interest at a rate of eleven percent (11%) per
annum, except that during the continuance of any event of default. As of June
17, 2010, the interest rate was increased to sixteen percent (16%) from eleven
percent (11%).
As of
June 30, 2010, the principal balance due on the Term Note was and is
$3,983,000.
46
Warrants.
In connection
with the Loan Agreement, we issued warrants to ComVest to purchase the following
amounts of shares of our common stock, exercisable after December 21, 2007 and
expiring December 31, 2013: a) warrants to purchase 1,000,000 shares of
common stock at an exercise price of
$0.3125 per share; b) warrants to purchase
2,000,000 shares of common stock at an exercise price of $0.39 per share; and c)
warrants to purchase 2,083,333 shares of our common stock at an exercise price
of $0.3625 per share. The warrants also contain a cashless exercise
feature. The number of shares of common stock issuable upon exercise
of the warrants, and/or the applicable exercise prices, may be proportionately
adjusted in the event of any stock dividend, distribution, stock split, stock
combination, stock consolidation, recapitalization or reclassification or
similar transaction. In addition, the number of shares issuable upon exercise
of the warrants, and/or the applicable exercise
prices may be adjusted, at any time
while the warrants are outstanding, in the event of certain issuances of shares
of our common stock, or securities entitling any person to acquire shares of our
common stock, at an effective price per share which is less than the
then-effective exercise prices of the warrants.
The
exercise prices for 3,000,000 of these warrants were subsequently modified in
connection with waivers we received for violations of one of our debt covenants,
as discussed further below.
Debt
Covenants. The Loan Agreement contains customary affirmative and
negative covenants, including:
(a)
|
Maximum
limits for capital expenditures of $600,000 per fiscal
year;
|
(b)
|
Limitation
on future borrowings, other than in certain circumstances, including to
finance capital expenditures;
|
(c)
|
Limitation
on guaranteeing any obligation, except for obligations in the ordinary
course of business and obligations of our wholly owned subsidiaries
incurred in the ordinary course of
business;
|
(d)
|
Limitation
on entering Sales-Leaseback Transactions with respect to the sale or
transfer of property used or useful in our business
operations;
|
(e)
|
Limitation
on acquiring securities or making
loans;
|
(f)
|
Limitation
on acquiring real property;
|
(g)
|
Limitation
on selling assets of the Company or permitting any reduction in our
ultimate ownership position of any
subsidiary;
|
(h)
|
Limitation
on paying dividends;
|
(i)
|
Limitation
on selling any accounts receivable;
and
|
47
(j)
|
Requiring
that, at the end of any quarter of any fiscal year, the ratio of (a)
Earnings Before Interest, Depreciation, and Amortization (“EBIDA”) minus
capital expenditures incurred to maintain or replace capital assets, to
(b) debt service (all interest and principle payments), for the four (4)
consecutive quarters then ended, to be not less than 1.25 to 1.00 (the
“EBIDA Ratio Covenant”).
|
The Loan
Agreement is collateralized by a pledge of all of our assets and the stock of
our subsidiaries. Certain of the loan covenants described above prohibit us from
paying dividends or borrowing additional funds
for working
capital requirements. The prohibition
on paying dividends may restrict our ability to raise capital through the sale
of shares of preferred stock that we may designate in the future, because such
shares are typically more marketable with dividend rights. If we were
to raise capital through the sale of shares of our
common stock and those shares were
sold for less than the applicable
exercise price(s) of the warrants issued to ComVest, or were issued for less
than the applicable conversion price of the Term Note, then automatically and
without further consideration, the exercise price of the warrant(s) and the
conversion price of the Term Note will be reduced based on a formula based upon
the selling price of the shares and the number of shares sold. We
cannot assure you that we will be able to sell any shares of our common
stock. Even if we were able to sell such shares, we cannot currently
predict the selling price. The sale of any such shares would result
in immediate dilution to our existing shareholders’ interests.
May 15,
2008 Waiver and Amendment. Subsequent to March 31, 2008, we notified
ComVest that we had incurred a loss of $1,897,000 for the three-month period
ending March 31, 2008, and as a result, we had a ratio of EBIDA to debt service
of (4.41):1.00, therefore violating the EBIDA Ratio Covenant. ComVest agreed to
grant us a waiver for this violation. On May 15, 2008, we entered into a Waiver
and Amendment (the “May 15, 2008 Waiver and Amendment”) pursuant to which
ComVest granted us the waiver, and in consideration therefor, we reduced the
exercise price for 1,000,000 of the warrants issued to ComVest in connection
with the Loan Agreement from $0.3125 per share to $0.11 per share. As a result
of ComVest granting us this waiver, we were not in violation of any loan
covenants at March 31, 2008.
September
23, 2008 Waiver and Amendment. Subsequent to June 30, 2008, we advised
ComVest that we had incurred a loss of $11,664,000 for the six-month period
ending June 30, 2008, and that as a result had again violated the EBIDA Ratio
Covenant with an EBIDA to debt service ratio of (2.26):1.00. ComVest agreed to
provide us with another waiver. In connection therewith, we entered into a
letter agreement amending the Loan Agreement (the “September 23, 2008 Waiver and
Amendment”) and modifying the EBIDA Ratio Covenants. Pursuant to the September
23, 2008 Waiver and Amendment, the EBIDA Ratio Covenant was waived for the
quarter ending September 30, 2008 and was reduced to 0.62:1.00 from 1.25:1.00
for the quarter ended December 31, 2008.
48
Additionally,
the EBIDA Ratio Covenant was reset for future quarters to 0.71:1.00 for the four
quarters ended March 31, 2009; 0.50:1.00 for the four quarters ended June 30,
2009; and 1.25:1.00 for the four quarters ended on or after September 30, 2009.
Additionally, ComVest agreed to delay the commencement of the loan amortization
related to the Term Note for one year, from January 1, 2009 to January 1, 2010.
In consideration for these modifications, we reduced the exercise price related
to 2,000,000 of the warrants issued to ComVest in connection with the Loan
Agreement from $0.39 to $0.11. As a result of these amendments, we were not in
violation of any loan covenants at June 30, 2008. The incremental
fair value of the modified warrants is $15,000, which was recorded as an
additional debt discount and is being amortized over the remaining life of the
term loan pursuant to EITF 96-19, “Debtor's Accounting for a Modification or
Exchange of Debt Instruments.” As a result of these amendments, we
were not in violation of any loan covenants at June 30, 2008.
February
10, 2009 Waiver and Amendment. Subsequent to the end of the quarter ended
December 31, 2008, we advised ComVest that we had incurred a net loss of
$5,349,000 for the six month period ended December 31, 2008, and that as a
result, our ratio of EBIDA to debt service was (1.41):1.00 in violation of the
amended EBIDA Ratio Covenant. ComVest agreed to extend an additional waiver of
this covenant, which was granted on February 10, 2009, under a Waiver and
Amendment #2 letter agreement (the “February 10, 2009 Waiver and
Amendment”). In consideration for the waiver, we agreed to increase
the interest rate on the $1,000,000 Credit Facility from 9.5% to 11%. As a
result of ComVest granting us this waiver, we were not in violation of any loan
covenants at December 31, 2008. If we restore compliance with the EBIDA Ratio
Covenant as of the close of any quarter ending on or after March 31, 2009, then
the annual interest rate will be restored to 9.5%, effective as of the first day
of the calendar month next succeeding our demonstrated quarter-end compliance
with such covenant.
April 22,
2009 Amendment. Effective April 22, 2009, we entered into a letter
agreement dated April 14, 2009 (the “April 22, 2009 Amendment”) with ComVest
pursuant to which we further amended the EBIDA Ratio
Covenant. Pursuant to the April 22, 2009 Amendment, the EBIDA Ratio
Covenant requires that the applicable minimum EBIDA Ratio be met as of the end
of the quarter for such fiscal quarter. Prior to the April 22, 2009 Amendment,
the Covenant required that the applicable minimum EBIDA Ratio be met as
of the end of each quarter of any fiscal year for the four (4) consecutive
quarters then ended. The minimum EBIDA Ratios themselves were not
modified by the April 22, 2009 Amendment, and remain at 0.71:1.00 for the
quarter ended March 31, 2009; 0.50:1.00 for the quarter ended June 30, 2009; and
1.25:1.00 for the quarter ended on or after September 30, 2009.
Pursuant
to a waiver and amendment, the annual interest rate was restored to 9.5% as the
Company became compliant with the covenant as of the close of the quarter ended
on March 31, 2009.
49
Our
violations of the EBIDA Ratio Covenant described above did not and will not have
any impact on any other loan agreements to which we are a
party. However, pursuant to the terms of the Loan Agreement, if we
default on any other indebtedness in excess of $100,000 and such default creates
an acceleration of the maturity of such indebtedness, then we would be in
default of our ComVest Loan Agreement.
As of
March 31, 2010, the Company did not meet the EBIDA Ratio Covenant of 1.25:1 as
required by the Loan Agreement, and Amendment. Our failure to maintain this
ratio constitutes an event of default under the terms of the Loan
Agreement. Under the terms of the Loan Agreement, if any event of default
occurs, the full principal amount of the Note, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall become, at
ComVest’s election, immediately due and payable in cash. On June 2, 2010
ComVest charged the Company a $25,000 forbearance fee and June 17, 2010,
increased the interest rate from 11% to 16%.
As of
June 30, 2010, the Company did not meet the EBIDA Ratio Covenant of
1.25:1 as required by the Loan Agreement, and
Amendment. Our failure to maintain this ratio
constitutes an event of default under the terms of the Loan Agreement.
Under the terms of the Loan Agreement, if any event of default occurs, the full
principal amount of the Note, together with interest and other amounts owing in
respect thereof, to the date of acceleration shall become, at ComVest’s
election, immediately due and payable in cash, and increased the interest rate
to 13% for the Revolving Credit Note and 16% for the Term Note. The
Company has entered into a forbearance agreement to resolve the default with
ComVest.
Off
Balance Sheet Arrangements
The
Company’s only off balance sheet arrangements are its operating leases. The
Company leases its facilities and certain equipment pursuant to month-to-month
and non-cancelable operating lease agreements that expire on various dates
through October 2028. Terms of the leases provide for monthly payments ranging
from $500 to $15,300. For the years ended June 30, 2010 and 2009, the Company
incurred rent expense totaling approximately $459,000 and $586,000,
respectively.
Future
annual minimum payments under non-cancelable operating leases are as
follows:
Years Ending
June 30,
|
||||
2011
|
$
|
459,000
|
||
2012
|
375,000
|
|||
2013
|
349,000
|
|||
2014
|
344,000
|
|||
2015
|
326,000
|
|||
Thereafter
|
2,535,000
|
|||
$
|
4,388,000
|
50
Current
Products and Services
Meeting
the needs of the automotive aftermarket requires a combination of business
management systems, information products and online services that combine to
deliver benefits for all parties involved in the timely repair of a vehicle. Our
products and services include:
·
|
Business
management systems comprised of our proprietary software applications,
implementation and training and third-party hardware and
peripherals;
|
·
|
Information
products such as an accessible catalog database related to parts, tires,
labor estimates, scheduled maintenance, repair information, technical
service bulletins, pricing and product features and benefits, which are
used by the different participants in the automotive
aftermarket;
|
·
|
Online
services and products that connect manufacturers, warehouse distributors,
retailers and automotive service providers via the internet. These
products enable electronic data interchange throughout the automotive
aftermarket supply chain among the different trading partners. They also
enable procurement and business services to be projected over the internet
to an expanded business audience. Some UK clients use our information
products on their own websites and intranets; some clients in North
America and the UK use our systems and branded software to obtain relevant
and up-to-date information via the internet;
and
|
·
|
Customer
support and consulting services that provide phone and online support,
implementation and training.
|
Need
for Technology Solutions
A variety
of factors drive the automotive market’s need for sophisticated technology
solutions, including the following:
Inventory
Management
Industry
sources suggest that approximately 35% of parts produced are never sold and 30%
of parts stocked are never sold. Approximately 25% of parts sold are eventually
returned due to insufficient knowledge or capability by either the parts
supplier counterman or the auto service provider installer. Clearly, there is
substantial inefficiency in the automotive aftermarket supply chain. This
inefficiency results in excess inventory carrying costs, logistical costs and
the over-production of parts and tires at the manufacturer level. Overcoming
these challenges requires the combination of business systems software,
information products, and connectivity services we offer.
51
Competition
In the
US, the need for technology solutions has been accelerated by the expansion of
large specialty parts retailers such as Advance Auto Parts, Inc. and large auto
service chains like Monro Muffler and Brake, Inc. This expansion has driven
smaller competitors to
computerize or upgrade their existing systems with more modern business
management solutions enabled for information products and online services. Many
of the systems used by smaller competitors today are older, character-based or
systems developed in-house that have a limited ability to integrate current
information products and online services.
Volume
and Complexity of Information
Businesses
in the automotive aftermarket manage large volumes of information from numerous
sources with complex inter-relationships. There are over 4.5 million different
stock-keeping units (“SKUs”) available to parts sellers in the product catalogs
used by the US automotive aftermarket. The numbers of SKUs increase in the order
of some 5% each year. Moreover, manufacturers update product information and
product prices with increasing frequency as they improve their internal
processing and try to keep pace with consumer trends. As a result, most
automotive aftermarket businesses require sophisticated inventory management
systems, accurate and timely information on parts, tires, and repair delivered
through online services to communicate, manage and present this volume of data
effectively.
Customer
Service Requirements
Consumer
demand for same-day repair service and the need to maintain efficient use of
repair bays, forces automotive service providers to demand prompt and accurate
delivery of specific parts and tires from their suppliers. Getting the required
product promptly depends on all the parties having access to timely information
about product price and availability. To meet these demanding customer service
requirements successfully, automotive aftermarket participants need business
management systems, product information and online services that enable workers
to reliably and accurately transact their business between warehouse
distributors, parts stores and automotive service providers.
Regional
Efficiencies
The use
and availability of a combination of business management systems, information
products and online services has resulted in the development of regional trading
networks among auto service provider chains, stores and warehouse distributors
of parts and tires. This enables participants to achieve the efficiencies and
customer service levels that are critical to being competitive and successful
against the larger retail and service chains in the automotive
aftermarket.
52
Areas
of Growth
We expect
growth in the automotive aftermarket will continue to be driven by:
·
|
gradual
growth in the aggregate number of vehicles in
use;
|
·
|
an
increase in the average age of vehicles in
operation;
|
·
|
fewer
new vehicles being purchased due to a slow down in the
economy;
|
·
|
growth
in the total number of miles driven per vehicle per year;
and
|
·
|
increased
vehicle complexity.
|
Plans
for Growth
We see
opportunities to expand the breadth of our client base within the automotive
industry and diversify into new industries with similarly complex needs. We plan
to offer tailored business management and distribution software to the wholesale
distributor market of the automotive industry. We have also started to expand
and diversify our client and product mix in the UK to serve the lumber and
hardware industries, which we believe have an unmet need for the efficiency
offered by our suite of business software solutions
and services. Our growth plans include adapting and updating our software
products to serve other vertical markets as well as through potential
acquisitions.
Additional
Vertical Markets: the Lumber, Hardware and Wholesale Distributor Markets and
Additional Territories
We have
identified that the lumber, hardware and wholesale distribution industries would
benefit from the business management and distribution systems developed by MAM
Software Ltd for its customers in the automotive aftermarket. We already have 40
UK clients operating in the hardlines and lumber market and electrical wholesale
distribution market who are using a derivative of MAM Software Ltd’s Autopart
product, known as “Trader.” We originally moved the Autopart product into these
additional vertical markets a number of years ago after being approached by
companies operating within these vertical markets who could not find a
management solution that satisfied their requirements. To date, these additional
vertical markets have made only a limited contribution to the revenues of MAM
Software Ltd.
These new
market opportunities are made up of the following: The lumber and hardware
market consists of independent lumber and building materials yards, independent
hardware retailers, home improvement centers, retail nurseries and garden
centers. Wholesale distributors of products, include electrical suppliers,
medical suppliers, plumbing, heating and air conditioning, brick, stone and
related materials, and industrial suppliers,
services, machinery and equipment, among others.
53
We have
been increasing our promotion of the “Trader” product to these markets,
specifically targeting medium sized businesses with revenues of between $2
million and $10 million. We are, and intend to continue, doing this through a
number of channels, internet, direct marketing, advertorials and trade shows.
The Internet channel initially focused on raising awareness of the website and
the Trader product through a new website specifically for the Trader product.
This in turn has been tied to advertising via the internet, by placing banner
ads on industry websites such as Building.co.uk, a UK website aimed at the
building trade and EDA.com, which is the UK Electrical Distributors Association
website. These banner ads have been directing customers to straight through to
the Trader website where the benefits of this system are explained. We have also
looked to raise awareness of the Trader product by placing advertisements
in trade journals and will continue to look to have articles and editorial
reviews written about the product and its advantages for those operating within
these markets. We have also been targeting medium sized businesses within these
vertical markets with direct mail pieces such as product fliers, product demo
CDs and case studies from the small client base we have in this market. These
have then been followed by MAM’s existing internal sales team to generate
qualified leads for the external sales representatives. We recognize that we
will need increased industry experience to sell effectively within these markets
and intend to recruit a suitably experienced and qualified sales manager to lead
this development. In addition to direct marketing we have attended trade shows
and exhibitions that have given us the opportunity to invite businesses that we
have targeted previously while giving us exposure to those businesses that as
yet we haven’t connected with.
We
believe that there are many opportunities in other parts of the world where we
could sell our technologies and services. We are considering expanding into
markets such as South Africa, Australia and India as well as Spanish speaking
nations in central and south America and may wish to establish operations in
partnership with regional businesses to assist us in both the sales and
administrative aspects of building a global business.
Strategic
Goals
We hope
to increase our share of the US and Canadian markets by (i) increasing the sales
and marketing presence of our Autopart product, (ii), focusing on the service
station element of the market (iii) and establishing OpenWebs™ as the e-commerce
standard within the Automotive market. In the UK and Europe we expect to
continue to grow our market share through (i) moving our supply chain management
software into new vertical markets, (ii) alliances with major manufacturers and
national retail chains within the automotive aftermarket, and (iii) an increased
marketing presence. We believe that our successful
experience within the automotive market will translate well into other vertical
markets that have similarly complex supply chains. By developing specific sales
teams with relevant market experience and supporting with them suitable
marketing collateral, we believe that within two years these teams will generate
significant revenue and earnings. The Company plans, at this stage, to focus
only on the UK for these additional vertical market
opportunities.
54
Development
Cost
Our plan
of operation in the next twelve months continues a strategy for growth within
our existing subsidiaries with an on-going focus on growing our US operation. We
estimate that the operational and strategic development plans we have identified
will require approximately $11,600,000 of funding. We expect to spend
approximately $3,300,000 on research and development, $5,500,000 in general and
administrative expenses and $2,800,000 on sales and marketing in our growth
plan. In addition to using these funds to grow our core business in the US, we
also plan to utilize a portion of these development costs to adapt our existing
products to serve the wholesale distributor market place in other
industries.
We plan
to finance the required $11,600,000 with a combination of cash flow from
operations as well as cash raised through equity and debt
financings.
Summary
We expect
to see continued growth from both the US and UK operations during fiscal 2011
with strong growth in revenues and operating income from the US operation. We
have identified a number of opportunities to widen our client base within the
automotive industry and are actively pursuing those at this time. We also expect
to see increases in revenue over the next two quarters, specifically due to
additional products that have been developed by the US operation which are
currently being released to customers, and the reintroduction of our Autopart
line of products in the US market.
We intend
to continue to work at maximizing customer retention by supplying and developing
products that streamline and simplify customer operations, thereby increasing
their profit margin. By supporting our customers’ recurring revenues, we expect
to continue to build our own revenue stream. We believe that we can continue to
grow our customer base through additional sales personnel, targeted media and
marketing campaigns and products that completely fit clients’ requirements. We
also intend to service existing clients at higher levels and increasingly
partner with them so that together we both will achieve our goals.
Revenues
in the UK are continuing to generate positive cash flow and free cash and the US
operations are also generating free cash flow
but corporate expenses resulted in a
negative
cash flow for the year ended June 30, 2010. Our current plans still require us
to hire additional sales and marketing staff and to support expanded operations
overall. We believe our plan will strengthen our relationships with our
existing customers and provide new income streams by targeting additional
English-speaking auto industry aftermarkets for our Autopart
product. If we continue to experience negative cash flow we will be
required to limit our growth plan.
55
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk.
|
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary Data.
|
The
financial statements, notes to the financial statements and report of the
Company’s independent registered accountant required to be filed in response to
this Item 8 begin on page F-1.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None
Item
9A.
|
Controls
and Procedures
|
(a)
|
Evaluation
of disclosure controls and
procedures
|
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered by this report. Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by us in
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosures.
56
(b)
|
Management’s
report on internal control over financial
reporting
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of June 30, 2009 based on the criteria set forth in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the criteria set forth in Internal Control — Integrated Framework,
our management concluded that our internal control over financial reporting was
effective as of June 30, 2010.
This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. We were not required to have, nor have we engaged our independent
registered public accounting firm to perform, an audit on our internal control
over financial reporting pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
Annual Report.
Inherent
Limitations on Internal Control
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. These inherent limitations include the
realities that judgments in decision making can be faulty, and that breakdowns
can occur because of simple errors. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
(c)
|
Changes
in internal control over financial
reporting
|
There
were no changes in the Company’s internal control over financial reporting in
the Company’s fourth fiscal quarter of the fiscal year ended June 30, 2010
covered by this Annual Report on Form 10-K, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
9B.
|
Other
Information
|
None.
57
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance
Our
executive officers, directors and other significant employees and their ages and
positions are as follows:
Name
|
Age
|
Position
|
||
Michael
Jamieson
|
43
|
Chief
Executive Officer and Director
|
||
Charles
F. Trapp
|
60
|
Chief
Financial Officer of the Company
|
||
Dwight
B. Mamanteo
|
41
|
Director
|
||
Marcus
Wohlrab
|
47
|
Director
|
||
Frederick
Wasserman
|
56
|
Director
|
||
Gerald
M. Czarnecki
|
69
|
Chairman
of the Board of Directors of the Company
|
||
W.
Austin Lewis IV
|
34
|
Director
|
Michael Jamieson was appointed
to the Board and to the position of interim Chief Executive Officer in February
2010. Mr. Jamieson previously served as Chief Operating Officer and a
director of the Company from December 2005 to March 2007. Mr.
Jamieson has served as Managing Director of MAM's subsidiary, MAM Software Ltd.
(“MAM”), since 2004. Mr. Jamieson joined MAM in 1991 in its
installation and configuration department and has held a number of positions
within MAM's implementation and support departments until his appointment as
Department Manager for Workshop and Bodyshop Systems in 1995. Mr. Jamieson was
promoted to the position of Associate Director of Workshop and Bodyshop Systems
in 2002 before taking his current role as Managing Director of MAM in 2004 .
Charles F. Trapp was appointed
Vice President of Finance and Chief Financial Officer on November 30, 2007,
following the resignation of the company’s former CFO, Michael O’Driscoll. Mr.
Trapp was the co-founder and President of Somerset Kensington Capital Co., a
Bridgewater, New Jersey-based investment firm that provided capital and
expertise to help public companies restructure and reorganize from 1997 until
November 2007. Earlier in his career, he served as CFO and/or a board member for
a number of public companies, including AW Computer Systems, Vertex Electronics
Corp., Worldwide Computer Services and Keystone Cement Co. His responsibilities
have included accounting and financial controls, federal regulatory filings,
investor relations, mergers and acquisitions, loan and labor negotiations, and
litigation management. Mr. Trapp is a Certified Public Accountant and received
his Bachelor of Science degree in Accounting from St. Peter’s College in Jersey
City, New Jersey.
Dwight B. Mamanteo became a
Director of the Company on March 1, 2007. Mr. Mamanteo serves as the Chairman of
the Company’s Compensation Committee and as a member of the Company’s Audit
Committee and as a member of the Company’s Governance Nomination Committee. From
November 2004 to the present, he has served as an investment analyst and
portfolio manager at Wynnefield Capital Inc., a private investment firm
headquartered in New York City. From September 1999 to June 2004, he served as
manager of Global Alliances Technical Services for BEA Systems in the US and
France. He has also provided technical consulting services to Delta
Technologies, VISA International, Liberty Mutual, Ameritec Communications and
Ericcson Communications. Mr. Mamanteo also serves on the Board of Directors of
PetWatch Animal Hospitals, Inc and served on the Board of Directors of Sevis
Sherpa Corporation, where he chaired the Compensation Committee. He received his
MBA from the Columbia University Graduate School of Business and his Bachelor of
Electrical Engineering from Concordia University (Montreal).
58
Marcus Wohlrab became a
Director of the Company on March 1, 2007. Mr. Wohlrab is the Chairman of the
Governance and Nomination Committee and is a member of the Compensation
Committee. In April 2001, Mr. Wohlrab founded Easting Capital Limited, a company
that serves as a placing agent for credit and interest rate securities as well
as negotiating public finance deals for large infrastructure projects as well as
private companies. Easting Capital has recently been re launched beginning 2008
with new shareholders and is now known as M2group AG registered in Switzerland.
From October 2000 to April 2001, Mr. Wohlrab was Executive Vice President Market
Development for Easdaq, the pan-European Stock Market for growth companies
(later acquired by NASDAQ). From January 1998 to September 2000, he served as
Director Europe and Middle East for NASDAQ International. He also founded, built
and helped finance WinWatch/WinVista, a software programming entity focused on
Internet and Windows security products. He was also Director of Corporate
Finance for Modatech Systems, Assistant Director for the Union Bank of
Switzerland, Vice President of Sales and Marketing for Paine Webber
International, and Vice President for Wood Gundy/CIBC/Oppenheimer. Mr. Wohlrab
received a Bachelor of Science degree in Mathematics and Geology from Devon
University and is fluent in Italian, French, German and English.
Frederick Wasserman became a
Director of the Company on July 17, 2007. Mr. Wasserman is the Chairman of the
Audit Committee and is a member of the Governance and Nomination Committee. Mr.
Wasserman is President of FGW Partners, LLC, a financial management consulting
firm he started, effective as of May 1, 2008. From August 2005 to December 2006,
he served as Chief Operating and Chief Financial Officer of Mitchell & Ness
Nostalgia Company, a manufacturer of licensed sportswear. From January 2001 to
February 2005, he served as President and Chief Financial Officer of Goebel of
North America, a subsidiary of the manufacturer of M.I. Hummel products, W.
Goebel Porzellanfabrik Company. From December 1995 to January 2001 he served as
Vice-President of Finance and Chief Financial Officer of Papel Giftware, serving
as the company’s interim president from May 2000 to January 2001. He also brings
13 years of public accounting experience, most notably work with each of Coopers
& Lybrand and Eisner & Company. He received a Bachelor of Science degree
in Economics from the University of Pennsylvania’s Wharton School, and has been
a Certified Public Accountant. Mr. Wasserman also serves as a Director for the
following companies: Acme Communications, Inc. (chairman- Nominating Committee,
member- Audit Committee), Breeze-Eastern Corporation (Chairman- Audit
Committee), TeamStaff, Inc., (Chairman of the Board of Directors) and (Chairman-
Audit Committee), and Gilman + Ciocia, Inc. (Chairman- Compensation
Committee, Member- Audit Committee).
59
Gerald Czarnecki became a
Director of the Company on August 13, 2008. Mr. Czarnecki is the Chairman and
CEO of The Deltennium Group, Inc., a privately held consulting and direct
investment firm, since its founding in 1995. Since August 2007, Mr. Czarnecki
has served as President and CEO of 02Media, Inc., a private organization
providing direct response marketing campaign management and infomercial
production, educational and branded entertainment TV programming and Internet
marketing campaign management. From April 1, 2007 to January 15, 2008, Mr.
Czarnecki served as interim President & CEO of Junior Achievement Worldwide,
Inc., where he also serves on the board of directors, and as member of the
Executive Committee, and Chairman of its Human Resources, Compensation and
Pension Committees. Mr. Czarnecki is a member of the Board of Directors of State
Farm Insurance Company and is Chairman of the Audit Committee; a member of the
Board of Directors of Del Global Technology, Inc. since June 2003, and Chairman
of the Audit Committee; and a member of the Board of Directors of State Farm
Bank and State Farm Fire & Casualty. He is also a member of the advisory
board for Private Capital, Inc. and serves as Chairman of the Board of Trustees
of National University. In addition he is Chairman of the Board of National
Leadership Institute, a nonprofit organization dedication to facilitating
quality leadership and governance in nonprofit organizations; Chairman of the
National Association of Corporate Directors - Florida Chapter, and faculty
member; and member of the Board of Directors of Junior Achievement of South
Florida, Inc. Mr. Czarnecki holds a B.S. in Economics from Temple University,
and M.A. in Economics from Michigan State University, a Doctor of Humane Letters
from National University and is a Certified Public Accountant. Mr. Czarnecki
serves as our lead director.
W. Austin Lewis was appointed
to the Board on January 27, 2009. He currently serves as the Chief
Executive Officer of Lewis Asset Management Corp., an investment management
company headquartered in New York City which he founded in 2004. From
2003 to 2004, Mr. Lewis was employed at Puglisi & Company, a New York based
broker-dealer registered with FINRA, where he served as a registered
representative and managed individual client accounts, conducted due diligence
for investment banking activities and managed his own personal
account. In 2002, Mr. Lewis co-founded Thompson Davis, & Company,
Inc., a registered broker-dealer headquartered in Richmond, Virginia. From 1998
to 2002, Mr. Lewis was employed by Branch Cabell and Company, Inc. in Richmond,
Virginia (“Branch Cabell”) where he was a registered representative. Following
the November 2000 acquisition of Branch Cabell by Tucker Anthony Incorporated
(“Tucker Anthony”), Mr. Lewis served as a Vice-President for Tucker Anthony and
subsequently RBC Dain Rauscher, Inc. which acquired Tucker Anthony in August of
2001. Mr. Lewis received his Bachelor of Science degree in Finance
and Financial Economics from James Madison University in 1998.
60
Board
Committees
The
Company’s Board of Directors has three standing committees of the Board: a
Compensation Committee, an Audit Committee and Governance and Nomination
Committee. The directors named above serve on the following Board
committees:
Compensation Committee:
|
Audit Committee
|
Governance and
Nomination Committee
|
||
Dwight
B. Mamanteo – Chair
|
Dwight
B. Mamanteo
|
Dwight
B. Mamanteo
|
||
Marcus
Wohlrab
|
Frederick
Wasserman** – Chair
|
Marcus
Wohlrab – Chair
|
||
Gerald
M. Czarnecki -ex officio member
|
Gerald
M. Czarnecki -ex officio member
|
Frederick
Wasserman
|
||
W.
Austin Lewis IV
|
W.
Austin Lewis IV
|
Gerald
M. Czarnecki -ex officio
member
|
**
|
The
Board of Directors has determined that Frederick Wasserman is a financial
expert as defined in Regulation S-K promulgated under the Securities
Act.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Under the
securities laws of the United States, our directors, executive (and certain
other) officers, and any persons holding ten percent or more of our Common Stock
must report on their ownership of the Common Stock and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established. During the fiscal year ended June 30, 2009,
we believe that all reports required to be filed by such persons pursuant to
Section 16(a) were filed on a timely basis.
61
Item
11. Executive
Compensation
Compensation
Discussion and Analysis
Overview
The
Compensation Committee (the “Compensation Committee” or the “Committee”) of the
Board administers our executive compensation program. Each member of the
Committee is a non-employee and an independent director. The Compensation
Committee is responsible for establishing salaries, administering our incentive
programs, and determining the total compensation for our Chief Executive Officer
and other executive officers. The Compensation Committees seeks to achieve the
following goals with our executive compensation programs: to attract, motivate,
and retain key executives and to reward executives for value creation. The
Compensation Committee seeks to foster a performance-oriented environment by
tying a significant portion of each executive’s cash and equity compensation to
the achievement of performance targets that are important to the Company and its
stockholders. Our executive compensation program has three principal elements:
base salary, cash bonuses, and equity incentives under a recently established
2007 Long-Term Stock Incentive Plan (the “LTIP”).
Unless
otherwise noted, this Compensation Discussion and Analysis speaks as of the end
of the fiscal year ended June 30, 2009.
Compensation
Principles
We
believe the top growing companies design their compensation program to attract,
motivate, and retain highly talented individuals to drive business success. We
further believe that the ideal programs tend to be principle-based rather than
rules-based with such best practices compensation programs providing for the
opportunity for executives and other key employees to achieve significant
compensation upon the realization of objectives that clearly benefit a company
and its shareholders. The Committee believes that best-practices plan will
reflect the following principles:
(1) Compensation
should be related to performance
A proper
compensation program should reinforce our Company’s business and financial
objectives. Employee compensation will vary based on Company versus individual
performance. When the Company performs well against the objectives that the
Compensation Committee and Board will set, employees will receive greater
incentive compensation. To the extent the business does not achieve or meet
these objectives, incentive awards will be reduced or eliminated. An employee’s
individual compensation will also vary based on his or her performance,
contribution, and overall value to the business. Employees with sustained high
performance should be rewarded more than those in similar positions with lesser
performance.
62
(2) Our
employees should think like stockholders
The
second critical principle of our compensation programs should be to foster an
environment where our employees should act in the interests of the Company’s
stockholders. We believe that the best way to encourage them to do that is
through an equity interest in their company. Equity interest in a company
can be achieved in several respects: the establishment of equity incentive plans
that provide for the granting of equity-based awards, such as stock options
and/or restricted stock or performance share units to employees. This requires
the establishment of an omnibus long-term stock-based incentive plan, which LTIP
was approved and adopted by our Board and shareholders. While this plan also
provides for traditional stock options, we believe that options should not
form the dominant focus of a proper incentive plan and that performance
share units or performance vesting restricted stock grants represent a preferred
form of equity incentive. The philosophy behind such a structure is that as
employees earn more stock (as opposed to options) they will think more like
stockholders. Put another way, when all employees become owners, they think and
behave like owners.
(3) Incentive
compensation should be a greater part of total compensation for more senior
positions
The
proportion of an individual’s total compensation that varies with individual and
Company performance objectives should increase as the individual’s business
responsibilities increase. Thus, cash bonuses and LTIP-based compensation should
form the overwhelmingly dominant portion of overall compensation for the
Company’s senior employees and the milestones for payouts on those plans for our
senior employees are based entirely on corporate results.
Compensation
Targets
Our
Compensation Committee with the input of the officers of the Company has
established competitive targets for our executive officers that we believe
reflect the challenges of our business and create an equity-focused culture
throughout the entire Company.
We
believe that in allocating compensation among these elements, the compensation
of a company’s senior-most levels of management - those persons having the
greatest ability to influence a company’s performance - should be predominantly
performance-based, while more junior employees should receive a greater portion
of their compensation based on their base salary.
These
targets are described below under “Employment Agreements.”
63
Base
Salary and Cash Incentive
We divide
total cash compensation into a base salary portion and a cash incentive bonus
portion. The Compensation Committee establishes the Chief Executive Officer’s
targeted cash compensation first and then sets the cash compensation for other
officers accordingly, based on the function served by that officer, that
officer’s experience, and expected individual performance. Generally, we believe
that the higher the level of responsibility of the executive within our Company,
the greater the portion of that executive’s target total cash compensation that
consists of the cash incentive component. The higher the executive’s level of
responsibility within the Company, the greater the percentage of the executive’s
compensation that should be tied to the Company’s performance.
Equity
Incentive
Long-term
performance is achieved through an ownership culture that encourages such
performance by our executive officers through the use of stock and stock-based
awards. The Committee believes that the use of stock and stock-based awards
offers the best approach to properly achieving our goals. We believe that
stock-based compensation provide the principal method for executive officers to
acquire equity or equity-linked interests in the Company. We have implemented
the LTIP which we will utilize for such a purpose, which has received
shareholder approval.
Rationale
for Paying each Element
Base
compensation and participation in benefit plans are established to provide
employees with appropriate industry competitive terms. Director retainers are
paid partially to compensate directors for their considerable time investment
and to assist directors in covering their indirect operating expenses as
independent contractors. Annual incentive cash bonuses are paid to reward
employees for performance and stockholder value enhancement in the current year,
based upon targets set by the Board for the CEO and his direct reports, with the
CEO establishing the individual targets for all other employees.
LTIP
awards are designed to reward the building of long-term stockholder value, while
providing modest, interim rewards in the pursuit of such longer-term
objectives.
Determination
of Amounts to Pay
Base
salaries, benefits and potential cash bonuses are established based upon current
market conditions. Where needed, outside consultants may be retained to assist
in this process. Benefit plan structures may be evaluated periodically to
determine market competitiveness with similar companies.
Stock-based
awards to be granted are evaluated based upon projected total compensation
levels for participants assuming certain objectives are achieved. Since the
majority of the total potential compensation is based upon performance, our
expectation is that the total projected compensation level be well above
average, because the “at risk” compensation levels generally exceed 2/3 of
anticipated compensation under the assumption that bonus targets are met. The
Committee, taking into consideration management’s recommendations and with
sign-off from all independent directors, will set each year’s goals and
milestones, their weightings, and the formulas for award calculation. For
accounting purposes, cash elements are expensed as earned. LTIP awards are
expensed as provided for under ASC 718, and are further described in the
footnotes to the audited financial statements included in this Annual Report on
Form 10-K.
64
How
the Elements Interact
While
each element is set with certain needs in mind, the Committee also looks at the
total compensation package for each individual to determine that the total
payout is appropriate to the level of responsibility attributable to each
participant. The total compensation package will also include any bonus amounts
and awards to be based on performance targets, when such targets are ultimately
set by the Committee.
Chief
Executive Officer Compensation
The
Compensation Committee uses the same factors in determining the compensation of
our CEO as it does for other senior officers. Mr. Warwick’s annual
base salary for fiscal 2009 was $300,000, pursuant to the terms of his
employment agreement which was entered into effective as of December 1, 2008 and
is described further below under “Employment Agreements.” The terms
of Mr. Warwick’s employment agreement, a United Kingdom resident, also entitled
Mr. Warwick to a make-whole payment that will restore him to the British Pound
Sterling equivalent that existed on the effective date of the agreement in the
event that the value of the U.S. Dollar relative to the British Pound Sterling
increases such that his base salary is reduced, as a result of such currency
translation, by 10% or more.
Historically,
Mr. Warwick’s salary was set pursuant to his employment agreement that was
entered into with our former parent, ADNW. Following our spinoff from
ADNW, we entered into the employment agreement described below, and used a peer
group for comparison purposes for evaluation of his salary. The peer group was
determined by our independent directors. Our independent directors surveyed
companies whose revenue base and organizational size were consistent with ours
as well as several companies within our industry, which we defined as business
and supply chain management software solutions. The peer group was thus created
from a group of companies that were both similar in size as well as companies
within our industry segment. Finally, we compared the peer group to compensation
for similar companies that were in the midst of a turnaround.
Mr.
Warwick resigned from the Company effective January 31,
2010. Pursuant to the terms of the Separation Agreement entered into
on January 20, 2010 with Mr. Warwick, the Company agreed to pay $300,000 in
termination payments, payable over six months, and additional payments of
$75,000 if certain events occur.
65
Employment
Agreements - December 1, 2008
Effective
as of December 1, 2008 (the “Effective Date”), upon the approval of our Board of
Directors, we entered into employment agreements with each of Ian Warwick, our
then-President and Chief Executive Officer, Charles F. Trapp, our Executive Vice
President and Chief Financial Officer, and Simon Chadwick, our then-Executive
Vice President and Chief Operating Officer.
Ian
Warwick Employment Agreement
The
December 1, 2008 Employment Agreement with Mr. Warwick (the “Warwick Agreement”)
was for an initial term of two and one-half years from the Effective Date, and
was automatically renewable for successive one-year periods unless terminated by
Mr. Warwick or us. Mr. Warwick received an annual base salary of $300,000,
payable in U.S. dollars. The annual salary was to be increased to $350,000 upon
our achievement of a market capitalization goal of $50 million for at least 25
consecutive trading days. The terms of the Warwick Agreement also entitled Mr.
Warwick, a United Kingdom resident, to a make-whole payment that would
restore him to the British Pound Sterling equivalent that existed on the
Effective Date in the event that the value of the U.S. Dollar relative to the
British Pound Sterling increases such that his base salary is reduced, as a
result of such currency translation, by 10% or more (the “Make-Whole
Payment”).
The
Warwick Agreement also provided for an appointment to our Board of Directors, on
which Mr. Warwick served.
Mr.
Warwick was eligible for a performance-based annual cash incentive bonus of up
to 150% of his base salary in any fiscal year depending on the extent to which
the applicable performance goal(s) of the Company, which were to be established
by our Compensation Committee or pursuant to a formal bonus plan, were achieved,
subject to any operating covenants in place with respect to outstanding bank
debt. The Compensation Committee established an EBITDA-related target for the
fiscal year ended June 30, 2009, with respect to Mr. Warwick’s potential
incentive bonus for fiscal 2009.
In
addition, Mr. Warwick was entitled to participate in all of our benefit plans
and our equity-based compensation plans, which at the time consisted of our
LTIP. Pursuant to the Warwick Agreement, Mr. Warwick was awarded two grants of
3-year performance share unit awards under the LTIP, each for 500,000
performance share units as a base objective, with 30% of the award vesting in
the first year of the grant provided that the base target for that year is
met, 30% of the award vesting in the second year of the grant provided that
the base target for the second year is met, and 40% of the award vesting in the
third and final year of the grant provided that the base target for the third
year is met (“Performance Share Units”). The performance measures for these
awards, which have been set by the Compensation Committee, are based on
increases in our earnings per share (“EPS”) and return on invested capital
(“ROIC”). Further, with respect to both awards in each grant year, (i) if the
Company’s results amount to less than 80% of the established target(s), none of
the awards would vest; (ii) if the Company’s results are equal to 80% of the
established target(s), 50% of the award would vest; (iii) if the Company’s
results are equal to 100% of the established target(s), 100% of the award
would vest; and (iv) if the Company’s results are equal to or better than 120%
of the established target(s), 150% of the award would vest. Results between
these established parameters would be interpolated.
66
The
Warwick Agreement also entitled Mr. Warwick to be granted options to purchase
300,000 shares of our common stock under the LTIP. These options would vest as
to one-third of the award on each of the first three anniversaries of the grant
date, at a strike price of $0.75, $1.00 and $1.25, respectively. The options
expire ten years from the grant date.
The
Warwick Agreement provided that in the event Mr. Warwick’s employment was
terminated for Good Reason, for any reason other than for Cause, Death or
Disability or for Good Reason during the 30-day period immediately following the
first anniversary of the Effective Date (the “Window Period”), he was
entitled to, among other things, a severance payment equal to his 12 months base
salary. In addition, under such circumstances, all of Mr. Warwick’s stock
options, stock appreciation rights and restricted stock will immediately vest
and be payable in shares of our common stock and all of his performance share
units that would vest in the course of any fiscal year would vest on a pro
rata basis.
Mr.
Warwick resigned from the Company effective January 31,
2010. Pursuant to the terms of the Separation Agreement entered into
on January 20. 2010 with Mr. Warwick, the Company agreed to pay $300,000 in
termination payments, payable over six months, and additional payments of
$75,000 if certain events occur.
Charles
F. Trapp Employment Agreement
The
December 1, 2008 Employment Agreement with Mr. Trapp (the “Trapp Agreement”) was
for an initial term of one year from the Effective Date, and was automatically
renewable for successive one-year periods unless terminated by Mr. Trapp or us.
Mr. Trapp received an annual base salary of $220,000, payable in U.S. dollars.
Mr. Trapp was eligible for a performance-based annual cash incentive bonus
of up to 150% of his base salary in any fiscal year depending on the extent to
which the applicable performance goal(s) of the Company, which were to be
established by the Compensation Committee or pursuant to a formal bonus plan,
are achieved, subject to any operating covenants in place with respect to
outstanding bank debt. The Compensation Committee established an EBITDA-related
target for the fiscal year ended June 30, 2009, with respect to Mr. Trapp’s
potential incentive bonus for fiscal 2009.
67
In
addition, Mr. Trapp was entitled to participate in all of our benefit plans and
equity-based compensation plans, which at the time consisted of the LTIP. Mr.
Trapp was awarded two grants of 3-year Performance Share Unit awards under
the LTIP, each for 300,000 performance share units as a base objective, with the
same terms, performance targets and metrics as Mr. Warwick’s Performance Share
Unit awards described above. Mr. Trapp also was granted options to purchase
100,000 shares of our common stock under the LTIP. These options vest as to
one-third of the award on each of the first three anniversaries of the grant
date, at a strike price of $0.75, $1.00 and $1.25, respectively. The options
expire ten years from the grant date.
The Trapp
Agreement provided that in the event Mr. Trapp’s employment was terminated for
Good Reason, for any reason other than for Cause, Death or Disability or for
Good Reason during the Window Period, Mr. Trapp would be entitled to,
among other things, a severance payment equal to his 12 months base salary, all
of Mr. Trapp’s stock options, stock appreciation rights and restricted stock
would immediately vest and be payable in shares of our common stock and all of
his performance share units that would vest in the course of any fiscal year
would vest on a pro rata basis.
The
Employment Agreement with Mr. Trapp was not renewed on November 30, 2009,
but Mr. Trapp has continued as Chief Financial Officer and Vice President,
Finance for the Company. On July 13, 2010, the Compensation Committee of the
Board of Directors approved a new employment agreement and bonus plan with Mr.
Trapp, as further described under “Employment Agreements - July 1,
2010.”
Simon
Chadwick Employment Agreement
The
Employment Agreement with Mr. Chadwick (the “Chadwick Agreement”) was for an
initial term of two years from the Effective Date, and was automatically
renewable for successive one-year periods unless terminated by Mr. Chadwick or
us. Mr. Chadwick will receive an annual base salary of $225,000, payable in U.S.
dollars. The terms of the Chadwick Agreement also entitled Mr. Chadwick, a
United Kingdom resident, to a Make-Whole Payment consistent with the one awarded
to Mr. Warwick.
The
Chadwick Agreement also provided for an appointment to our Board of Directors,
on which he served.
Mr.
Chadwick was eligible for a performance-based annual cash incentive bonus of up
to 150% of his base salary in any fiscal year depending on the extent to which
the applicable performance goal(s) of the Company, which were to be established
by the Compensation Committee or pursuant to a formal bonus plan, were achieved,
subject to any operating covenants in place with respect to outstanding bank
debt. The Compensation Committee established an EBITDA-related target for the
fiscal year ended June 30, 2009, with respect to Mr. Chadwick’s potential
incentive bonus for fiscal 2009.
68
In
addition, Mr. Chadwick was entitled to participate in all of our benefit
plans and our equity-based compensation plans, which at the time consisted of
the LTIP. Mr. Chadwick were awarded two grants of 3-year Performance Share
Unit awards under the LTIP, each for 400,000 performance share units as a base
objective, with the same terms, performance targets and metrics as Mr.
Warwick’s and Mr. Trapp’s Performance Share Unit awards described above. The
Chadwick Agreement also grants Mr. Chadwick options to purchase 200,000 shares
of our common stock under the LTIP. These options vested as to one-third of the
award on each of the first three anniversaries of the grant date, at a strike
price of $0.75, $1.00 and $1.25, respectively. The options expire ten years from
the grant date.
In the
event Mr. Chadwick’s employment was terminated for Good Reason, for any reason
other than for Cause, Death or Disability or for Good Reason during the Window
Period, Mr. Chadwick was entitled to, among other things, a severance payment
equal to his 12 months base salary, all of Mr. Chadwick’s stock
options, stock appreciation rights and restricted stock would immediately
vest and be payable in shares of our common stock and all of his performance
share units that would vest in the course of any fiscal year would vest on a pro
rata basis.
Mr.
Chadwick resigned from the Company effective January 31,
2010. Pursuant to the terms of the Separation Agreement entered into
on January 20. 2010 with Mr. Chadwick, the Company agreed to pay $225,000 in
termination payments, payable over six months, and additional payments of
$50,000 if certain events occur.
Employment
Agreements - July 1, 2010
On July
13, 2010, the Compensation Committee of the Board of Directors approved
employment agreements, including a bonus plan, with each of Michael Jamieson,
our President and Chief Executive Officer and Charles F. Trapp, our Executive
Vice President and Chief Financial Officer. Such employments
agreements and bonus plans were entered into as of July 1, 2010 (the “Effective
Date”), the first day of our 2011 fiscal year.
Michael
Jamieson Employment Agreement
The
Employment Agreement with Mr. Jamieson (the “Jamieson Agreement”) is for an
initial term of three years from the Effective Date, and is automatically
renewable for successive one-year periods unless terminated by Mr. Jamieson or
us. Mr. Jamieson will receive an annual base salary of 150,000 GBP
(approximately US$225,000), payable in British Pounds Sterling.
69
Mr.
Jamieson is eligible for a performance-based annual cash incentive bonus
depending on the extent to which the applicable performance goal(s) of the
Company, which are to be established by our Compensation Committee of our Board
of Directors (“Compensation Committee”) or pursuant to a formal bonus plan, are
achieved, subject to any operating covenants in place with respect to
outstanding bank debt. The Compensation Committee established an EBITDA-related
target for the fiscal year ended June 30, 2011, with respect to Mr. Jamieson’s
potential incentive bonus for fiscal 2011.
In
addition, Mr. Jamieson is entitled to participate in all of our benefit plans
and our equity-based compensation plans, which currently consists of our 2007
Long-Term Incentive Plan (the “LTIP”). Pursuant to the Jamieson Agreement, Mr.
Jamieson is to be awarded 500,000 restricted common shares under the LTIP (the
“Stock Grant”). The shares will vest ratably over a three-year
period, with 20% vesting on the first anniversary of the Stock Grant, 30%
vesting on the second anniversary of the Stock Grant, and 50% vesting on the
third anniversary of the Stock Grant.
The
Jamieson Agreement also entitles Mr. Jamieson to be granted options to purchase
2,109,375 shares of our common stock under the LTIP (the “Option Grant”). These
options will vest on the third anniversary of the grant date, at a strike price
of $0.08 per share, depending on the extent to which certain performance targets
have been met. The options expire ten years from the grant date, if
vested. If the Company’s results: (i) amount to less than 80% of the
established target(s), none of the Option Grant will vest; (ii) are equal to 80%
of the established target(s), 25% of the Option Grant will vest; (iii) are equal
to 100% of the established target(s), 50% of the award will vest; and (iv) are
equal to or better than 120% of the established target(s), 100% of the Option
Grant will vest. Results between these established parameters will be
interpolated. The Option Grant will vest immediately upon a Change of
Control.
The
Jamieson Agreement provides that in the event Mr. Jamieson’s employment is
terminated by the Company other than for Cause or Disability, or Mr. Jamieson
shall terminate his employment for Good Reason, he is entitled to, among other
things, a severance payment equal to his 12 months base salary. In addition,
under such circumstances, all of Mr. Jamieson’s stock appreciation rights and
restricted stock will immediately vest and all vested stock options and stock
appreciation rights shall be payable in shares of our common
stock.
70
Charles
F. Trapp Employment Agreement
The
Employment Agreement with Mr. Trapp (the “Trapp Agreement”) is for an initial
term of three years from the Effective Date, and is automatically renewable for
successive one-year periods unless terminated by Mr. Trapp or us. Mr. Trapp will
receive an annual base salary of $195,000, payable in U.S. dollars. Mr. Trapp is
eligible for a performance-based annual cash incentive bonus depending on the
extent to which the applicable performance goal(s) of the Company, which are to
be established by the Compensation Committee or pursuant to a formal bonus plan,
are achieved, subject to any operating covenants in place with respect to
outstanding bank debt. The Compensation Committee established an EBITDA-related
target for the fiscal year ended June 30, 2011, with respect to Mr. Trapp’s
potential incentive bonus for fiscal 2011.
In
addition, Mr. Trapp is entitled to participate in all of our benefit plans and
equity-based compensation plans, which currently consists of the LTIP. Pursuant
to the Trapp Agreement, Mr. Trapp is to be awarded 200,000 restricted common
shares under the LTIP (the “Stock Grant”). The shares will vest
ratably over a three-year period, with 20% vesting on the first anniversary of
the Stock Grant, 30% vesting on the second anniversary of the Stock Grant, and
50% vesting on the third anniversary of the Stock Grant.
The Trapp
Agreement also entitles Mr. Trapp to be granted options to purchase 1,828,125
shares of our common stock under the LTIP (the “Option Grant”). These options
will vest on the third anniversary of the grant date, at a strike price of $0.08
per share, depending on the extent to which certain performance targets have
been met. The options expire ten years from the grant date, if
vested. If the Company’s results: (i) amount to less than 80% of the
established target(s), none of the Option Grant will vest; (ii) are equal to 80%
of the established target(s), 25% of the Option Grant will vest; (iii) are equal
to 100% of the established target(s), 50% of the award will vest; and (iv) are
equal to or better than 120% of the established target(s), 100% of the Option
Grant will vest. Results between these established parameters will be
interpolated. The Option Grant will vest immediately upon a Change of
Control.
The Trapp
Agreement provides that in the event Mr. Trapp’s employment is terminated by the
Company other than for Cause or Disability, or Mr. Trapp shall terminate his
employment for Good Reason, he is entitled to, among other things, a severance
payment equal to his 12 months base salary. In addition, under such
circumstances, all of Mr. Trapp’s stock appreciation rights and restricted stock
will immediately vest and all vested stock options and stock appreciation rights
shall be payable in shares of our common stock.
Severance
Benefits
As
described above, each of the employment agreements with our officers contains a
severance benefit for that officer if he or she is terminated other than for
cause or the officer leaves the Company after a change in control, provided they
leave for “good reason.” We provide this benefit because we want executives to
focus on the Company’s business and enhancing stockholder value without undue
concern about any possible loss of their job.
71
Retirement
Plans
We do not
offer retirement plans for our officers.
Change
in Control
Each
officer’s employment agreement contains standard provisions that protect that
officer in the event there is a change in control that has not been approved by
our Board of Directors. In addition, our LTIP provides for acceleration of
vesting in the event of a change in control.
The
precise terms and conditions of each employment agreement is described
above.
Perquisites
We offer
limited perquisites for our executives. We may offer life insurance policies for
our Named Executive Officers, but as of the date of this report, have yet to
establish those policies.
Board
Process
The
Compensation Committee of the Board of Directors approves all compensation and
awards to executive officers, which include the Chief Executive, the Chief
Financial Officer, and Chief Operating Officer, and any other Named Executive
Officers. Generally, on its own initiative the Compensation Committee reviews
the performance and compensation of the Chief Executive, Chief Financial
Officer, and Chief Operating Officer and, following discussions with those
individuals, establishes their compensation levels where it deems appropriate.
For the remaining officers, the Chief Executive Officer makes recommendations to
the Compensation Committee that generally, with such adjustments and
modifications that are deemed necessary or appropriate by the Committee, are
approved. With respect to equity-based compensation awarded to others, the
Compensation Committee grants restricted stock, generally based upon the
recommendation of the Chief Executive Officer.
The
Compensation Committee believes that objectives cannot be established in a
vacuum and thus invites management’s input into the establishment of milestones.
Although Committee meetings are held in executive session, without management’s
presence, the Committee (and from time to time individual members of the
Committee) routinely meets with senior officers of the Company to discuss
objectives, to explain the rationale for certain objectives or milestones, and
to assure that it has management’s input in assessing the consequences of
decisions made in Committee, for instance, the impact that its decisions may
have on our financial statements. The Committee’s interactions with management
seek to achieve a balance between receiving management’s buy-in for objectives
and assuring that management is not actually or effectively establishing the
terms and parameters for its own compensation.
72
Forward-Looking
Statements
Disclosures
in this Compensation Discussion & Analysis may contain certain
forward-looking. Statements that do not relate strictly to historical or current
facts are forward-looking and usually identified by the use of words such as
“anticipate,” “estimate,” “approximate,” “expect,” “intend,” “plan,” “believe”
and other words of similar meaning in connection with any discussion of future
operating or financial matters.
Without
limiting the generality of the foregoing, forward-looking statements contained
in this report include the matters discussed regarding the expectation of
compensation plans, strategies, objectives, and growth and anticipated financial
and operational performance of the Company and its subsidiaries. A variety of
factors could cause the Company’s actual results to differ materially from the
anticipated results or other expectations expressed in the Company’s
forward-looking statements. The risks and uncertainties that may affect the
operations, performance and results of the Company’s business and
forward-looking statements include, but are not limited to those set forth
herein.
Any
forward-looking statement speaks only as of the date on which such statement is
made and the Company does not intend to correct or update any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Summary
Compensation Table for Fiscal Years 2010, 2009 and 2008
The
following table sets forth information for the fiscal years ended June 30, 2010,
2009 and 2008 concerning the compensation paid and awarded to all individuals
serving as (a) our Chief Executive Officer, Michael G. Jamieson, as of the end
of our fiscal year ended June 30, 2010, (b) the two most highly compensated
executive officers (other than our Chief Executive Officer) of ours and our
subsidiaries who were serving as executive officers at the end of our fiscal
year ended June 30, 2010, whose total compensation exceeded $100,000 for these
periods, Charles F. Trapp, and (c) up to two additional individuals for whom
disclosure would have been provided pursuant to (b) except that they were not
serving as executive officers at the end of such fiscal years, Ian Warwick and
Simon Chadwick. These individuals may be collectively referred to
herein as our “Named Executive Officers.”
73
Name and
Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compensation
($)
|
Non-
qualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||
Michael
G. Jamieson, (1)
Chief
Executive Officer,
President
and Director
|
2010
|
80,428
|
—
|
17,600
|
(5)
|
—
|
—
|
—
|
—
|
98,028
|
|||||||||||||||||||||
Ian
Warwick (2)
|
2010
|
475,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Former
Chief Executive
Officer, President |
2009
|
292,828
|
—
|
—
|
—
|
—
|
—
|
—
|
292,828
|
||||||||||||||||||||||
and
Director
|
2008
|
349,195
|
—
|
—
|
—
|
—
|
—
|
—
|
349,195
|
||||||||||||||||||||||
Simon
Chadwick (3)
|
2010
|
356,250
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Former
Chief Operating
|
2009
|
218,780
|
—
|
—
|
—
|
—
|
—
|
—
|
218,780
|
||||||||||||||||||||||
Officer and
Director
|
2008
|
259,402
|
—
|
—
|
—
|
—
|
—
|
—
|
259,402
|
||||||||||||||||||||||
Charles
F. Trapp (4)
|
2010
|
220,000
|
—
|
13,200
|
(6)
|
—
|
—
|
—
|
—
|
233,200
|
|||||||||||||||||||||
Executive
Vice President,
|
2009
|
224,166
|
—
|
5,775
|
(6)
|
—
|
—
|
—
|
—
|
229,941
|
|||||||||||||||||||||
and
Chief Financial Officer
|
2008
|
214,583
|
—
|
25,500
|
(6)
|
—
|
—
|
—
|
—
|
240,083
|
(1)
|
Reflects
salary paid to Mr. Jamieson for services rendered to us and our
subsidiaries during fiscal 2010 as MAM’s Chief Executive Officer and
President. Salary was paid by a subsidiary of the Company in
British pounds at an annual salary of 122,000 GPB per year. Mr.
Jamieson became Interim Chief Executive Officer and Interim President on
February 1, 2010 and was paid 50,830 GBP for the period from February 1,
2010 to June 30, 2010 pursuant to the terms of Mr. Jamieson’s employment
agreement with our subsidiary. The amount shown for 2010 was
translated to US dollars based on a June 30, 2010 currency conversion rate
of 1 GBP = $1.5823 (or $80,428). Mr. Jamieson did not receive any
additional compensation for his services as a director on our Board of
Directors.
|
74
(2)
|
Mr.
Warwick resigned his position as Chief Executive Officer, President and
Director effective as of January 31, 2010. Reflects salary paid
to Mr. Warwick for services rendered to us and our subsidiaries during
fiscal 2010, 2009 and 2008 as MAM’s Chief Executive Officer and
President. The salary for the period from July 1, 2009 to
January 31, 2010 was paid in US dollars at an annual base rate of $300,000
(or $175,000 for the period), pursuant to the terms of Mr. Warwick’s
employment agreement. Pursuant to the terms of Mr. Warwick’s
Separation Agreement he was paid $300,000 in six equal monthly
installments of $50,000 per month. Mr. Warwick was paid in
British pounds at an annual salary of 175,000 GPB for each of the 2008
fiscal year, and for the period from July 1, 2008 to November 30, 2008 (or
72,916 GBP). Salary for the period from December 1, 2008
through June 30, 2009 was paid in US dollars at an annual base rate of
$300,000 (or $175,000 for the period), pursuant to the terms of Mr.
Warwick’s employment agreement. The amount shown for 2008 was
translated to US dollars based on a June 30, 2008 currency conversion rate
of 1 GBP = $1.9954. The portion of Mr. Warwick’s salary for
fiscal 2009 which was paid in British pounds (for the period from July 1,
2008 through November 30, 2008) was translated to US dollars based on the
June 30, 2009 currency conversion rate of 1 GBP= $1.61593 (or $117,828).
Mr. Warwick did not receive any additional compensation for his services
as a director on our Board of
Directors.
|
(3)
|
Mr.
Chadwick resigned his position as Chief Operating Officer and Director
effective as of January 31, 2010. Reflects salary paid to Mr.
Chadwick for services rendered to us and our subsidiaries during fiscal
2010, 2009 and 2008 as MAM’s Chief Operating Officer. The
Salary for the period from July 1, 2009 to January 31, 2010 was paid in US
dollars at an annual base rate of $225,000 (or $131,250 for the period),
pursuant to the terms of Mr. Chadwick’s employment
agreement. Pursuant to the terms of Mr. Chadwick’s Separation
Agreement he was paid $225,000 in six equal monthly installments of
$37,500 per month. Salary was paid in British pounds at an annual salary
of 130,000 GPB for each of the 2008 fiscal year, and for the period from
July 1, 2008 to November 30, 2008 (or 54,167 GBP). Salary for
the period from December 1, 2008 through June 30, 2009 was paid in US
dollars at an annual base rate of $225,000 (or $131,250 for the period),
pursuant to the terms of Mr. Chadwick’s employment agreement.
The amount shown for 2008 was translated to US dollars based on a June 30,
2008 currency conversion rate of 1 GBP = $1.9954. The portion
of Mr. Chadwick’s salary for fiscal 2009 which was paid in British pounds
(for the period from July 1, 2008 through November 30, 2008) was
translated to US dollars based on the June 30, 2009 currency conversion
rate of 1 GBP= $1.61593 (or $87,530). Mr. Chadwick did not receive any
additional compensation for his services as a director on our Board of
Directors.
|
75
(4)
|
Mr.
Trapp was appointed Vice President Finance and Chief Financial Officer
effective as of December 1, 2007. For the year ended June 30, 2010, the
amount shown in the table reflects salary in the amount of $91,667 earned
for services in these capacities between July 1, 2009 and November 30,
2009, pursuant to the terms of Mr. Trapp’s employment agreement, as well
as salary in the amount of $128,333 earned for services between December
1, 2009 and June 30, 2010 pursuant to a month to month verbal agreement.
The salary for fiscal 2010 also includes $22,000 that was deferred and
contributed by Mr. Trapp to the Company’s plan established under section
401(k) of the Internal Revenue Code of 1986, as amended. For
the year ended June 30, 2009, the amount shown in the table reflects
salary in the amount of $95,833 earned for services in these capacities
between July 1, 2008 and November 30, 2008, as well as salary in the
amount of $128,333 earned for services between December 1, 2008 and June
30, 2009 pursuant to the terms of Mr. Trapp’s employment agreement. The
salary for fiscal 2009 also includes $20,500 that was deferred and
contributed by Mr. Trapp to the Company’s plan established under section
401(k) of the Internal Revenue Code of 1986, as amended. For
the year ended June 30, 2008, the amount shown in the table reflects
salary in the amount of $134,167 earned for services between December 1,
2007 and June 30, 2008, as well as salary in the amount of $80,416 earned
for services as an accountant prior to his appointment as an officer. The
salary for fiscal 2008 also includes $20,500 that was deferred and
contributed by Mr. Trapp to the Company’s plan established under section
401(k) of the Internal Revenue Code of 1986, as
amended.
|
(5)
|
The
amount shown in the “Stock Awards” column reflects the dollar amount
recognized for fiscal 2010 financial statement reporting purposes of the
outstanding stock awards held by Mr. Jamieson in accordance with FAS 123R.
Stock award represent an award on May 13, 2008 of 1,000,000 shares of
Common Stock with a grant date closing price of $0.10 per share, of which
34% or 340,000 shares vested immediately on the date of grant. The
remaining 66% of the shares or 660,000 shares will vest in three equal
installments of 220,000 shares on each of the first, second and third
anniversaries of the grant date. The shares were not issued pursuant to
any existing compensation plan. Refer to the Company’s Consolidated
Financial Statements for the Fiscal Years Ended June 30, 2010 and 2009,
Note 1 “Stock Based Compensation” and Note 9 “Stockholders Equity”
included in this Annual Report on Form 10-K, with respect to valuation
assumptions for this stock grant. Mr. Jamieson held no other stock or
option awards at June 30, 2010 and 2009,
respectively.
|
(6)
|
The
amount shown in the “Stock Awards” column reflects the dollar amount
recognized for fiscal 2010, 2009 and 2008 financial statement reporting
purposes of the outstanding stock awards held by Mr. Trapp in accordance
with FAS 123R. Stock award represent an award on May 13, 2008 of 750,000
shares of Common Stock with a grant date closing price of $0.10 per share,
of which 34% or 255,000 shares vested immediately on the date of grant.
The remaining 66% of the shares or 495,000 shares will vest in three equal
installments of 165,000 shares on each of the first, second and third
anniversaries of the grant date. The shares were not issued pursuant
to any existing compensation plan. Refer to the Company’s Consolidated
Financial Statements for the Fiscal Years Ended June 30, 2010 and 20097,
Note 1 “Stock Based Compensation” and Note 9 “Stockholders Equity”
included in this Annual Report on Form 10-K, with respect to valuation
assumptions for this stock grant. Mr. Trapp held no other stock or option
awards at June 30, 2010 and 20098,
respectively.
|
76
Other
Compensation
Other
than as described above, there were no post-employment compensation, pension or
nonqualified deferred compensation benefits earned by the executive officers
during the year ended June 30, 2010. We do not have any retirement, pension, or
profit-sharing programs for the benefit of our directors, officers or other
employees. The Board of Directors may recommend adoption of one or more such
programs in the future.
Outstanding
Equity Awards at 2010 Fiscal Year End
The
following table provides information relating to the vested and unvested option
and stock awards held by the named executives as of June 30, 2010. Each award to
each named executive is shown separately, with a footnote describing the award’s
vesting schedule.
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(# Exercisable)
|
Number of
Securities
Underlying
Unexercised
Option
(# Unexercisable)
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other Rights
That Have
Not
Vested
(#)
|
Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares, Units
Or Other
Rights
That Have
Not
Vested
($)
|
|||||||||||||||||||||||||
Michael
G. Jamieson
|
—
|
—
|
—
|
—
|
—
|
220,000
|
(1)
|
$
|
17,600
|
(3)
|
—
|
—
|
||||||||||||||||||||||
Charles
F. Trapp
|
—
|
—
|
—
|
—
|
—
|
165,000
|
(2)
|
$
|
13,200
|
(3)
|
—
|
—
|
||||||||||||||||||||||
Ian
Warwick
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||
Simon
Chadwick
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
|
Stock
awards represent an award on May 13, 2008 to Mr. Jamieson of 1,000,000
shares of Common Stock with a grant date fair value of $0.10 per share, of
which 34%, or 340,000 shares, vested immediately on the date of grant,
220,000 shares valued at $.035 per share vested on May 13, 2009 and
220,000 shares valued at $.08 per share vested on May 13, 2010 The
remaining 220,000 shares reflected in the table, will vest on May 13,
2011. The shares were not issued pursuant to any existing compensation
plan.
|
77
(2)
|
Stock
awards represent an award on May 13, 2008 to Mr. Trapp of 750,000 shares
of Common Stock with a grant date fair value of $0.10 per share, of which
34%, or 255,000 shares, vested immediately on the date of grant and
165,000 shares valued at $.035 per share vested on May 13, 2009 and
165,000 shares valued at $.08 per share vested on May 13, 2010. The
remaining 165,000 shares reflected in the table, will vest on May 13,
2011. The shares were not issued pursuant to any existing compensation
plan.
|
(3)
|
Based
on the closing price of $0.08 of the Company’s Common Stock on June 30,
2010.
|
Director
Compensation for Fiscal 2010
During
fiscal 2010, directors who were not officers of the Company received a $10,000
annual retainer, with the exception of the Chairman of the Board of Directors,
who received a $35,000 annual retainer. Directors who were not
officers of the Company also received $7,500 for serving as Audit Committee
Chairman, $6,000 for serving as Chairman of the Governance and Nomination or
Compensation Committees, and $5,000 for serving as a Committee Member. Directors
who are also executive officers of the Company do not receive any additional
compensation for their service on the Board.
The
following table reflects all compensation awarded to, earned by or paid to the
Company’s directors for the fiscal year ended June 30, 2010.
Fees
Earned or
Paid in
Cash
($)
|
Stock
Awards
($)(1)
|
Options
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compen-
sation
($) |
Total
($)
|
||||||||||||||||||||||
Michael
G. Jamieson
|
— | — | — | — | — | — | — | |||||||||||||||||||||
Ian
Warwick
|
— | — | — | — | — | — | — | |||||||||||||||||||||
Simon
Chadwick
|
— | — | — | — | — | — | — | |||||||||||||||||||||
Dwight
B. Mamanteo
|
26,000 | (2) | 6,785 | (3) | — | — | — | — | 32,785 | |||||||||||||||||||
Marcus
Wohlrab
|
21,000 | 7,987 | (4) | — | — | — | — | 28,987 | ||||||||||||||||||||
Frederick
Wasserman
|
22,500 | 8,518 | (5) | — | — | — | — | 31,018 | ||||||||||||||||||||
Gerald
M. Czarnecki
|
35,000 | (6) | 8,359 | (7) | — | — | — | — | 43,359 | |||||||||||||||||||
W.
Austin Lewis IV
|
20,000 | (8) | 8,353 | (9) | — | — | — | — | 28,353 |
78
(1)
|
The
amount shown in the table reflects the dollar amount recognized for fiscal
2010 financial statement reporting purposes of the outstanding stock
awards held by the directors in accordance with FAS 123R. Refer to the
Company’s Consolidated Financial Statements for the Fiscal Years Ended
June 30, 2010 and 2009, Note 1 “Stock Based Compensation” and Note 9
“Stockholders Equity” included in the Company’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2010, with respect to valuation
assumptions for this stock grant. The directors held no other stock or
option awards at June 30, 2010.
|
(2)
|
Includes
176,312 shares of Common Stock valued at market price on the date of
issuance, net of income taxes of $4,550, and received in lieu of $19,500
of cash compensation.
|
(3)
|
Includes
83,674 shares valued at market price on the date of issuance, net of
income taxes of $2,433.
|
(4)
|
Includes
98,304 shares valued at market price on the date of
issuance.
|
(5)
|
Includes
104,850 shares valued at market price on the date of
issuance.
|
(6)
|
Includes
280,313 shares of Common Stock valued at market price on the date of
issuance, net of income taxes of $12,250, and received in lieu of $22,750
of cash compensation.
|
(7)
|
Includes
102,885 shares valued at market price on the date of issuance, net of
income taxes of $4,502.
|
(8)
|
Includes
246,429 shares of Common Stock valued at market price on date of issuance,
and received in lieu of $20,000 of cash
compensation.
|
(9)
|
Includes
101,276 shares valued at market price on the date of
issuance.
|
Security
Ownership Of Certain Beneficial Owners And Management and Related
Stockholder Matters
|
The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of August 31, 2010 by (a) each stockholder who
is known to us to own beneficially 5% or more of our outstanding Common Stock;
(b) all directors; (c) our executive officers, and (d) all executive officers
and directors as a group. Except as otherwise indicated, all persons listed
below have (i) sole voting power and investment power with respect to their
shares of Common Stock, except to the extent that authority is shared by spouses
under applicable law, and (ii) record and beneficial ownership with respect to
their shares of Common Stock. Unless otherwise identified, the address of our
directors and officers is c/o MAM Software Group, Inc., Maple Park, Maple Court,
Barnsley, UK S75 3DP.
79
Name and address of beneficial owner
|
Amount and Nature of
Beneficial Ownership |
Percent of class of
Common Stock (1) |
||||||
Wynnefield
Persons (2)
c/o
Wynnefield Capital Inc.
450
Seventh Ave., Suite 509
New
York, NY 10123
|
10,829,479 | (3) | 12.61 | % | ||||
Quillen
Persons (4)
145
East 57th Street, 10th Floor
New
York, NY 10022
|
6,543,445 | (5) | 7.62 | % | ||||
ComVest
Capital LLC
105
S. Narcissus Ave.
West
Palm Beach, FL 33401
|
8,469,949 | (6) | 8.98 | % | ||||
Directors
and Officers:
|
||||||||
Michael
Jamieson
Chief
Executive Officer
|
1,460,000 | (7) | 1.71 | % | ||||
Charles
F. Trapp
Chief
Financial Officer
|
1,869,340 | (8) | 2.18 | % | ||||
Frederick
Wasserman,
Director
|
250,666 | (9) | 0.29 | % | ||||
Dwight
B. Mamanteo,
Director
|
781,866 | (10) | 0.91 | % | ||||
Marcus
Wohlrab,
Director
|
198,923 | (11) | 0.23 | % | ||||
Gerald
M. Czarnecki,
Chairman
|
1,211,983 | (12) | 1.41 | % | ||||
W.
Austin Lewis IV (13)
c/o
Lewis Asset Management Corp.
45
Rockefeller Plaza
New
York, NY 10111
|
10,335,037 | (14) | 12.03 | % | ||||
Directors
and Officers as a group (7 persons)
|
16,107,815 | 18.75 | % | |||||
Former
Officers and Directors:
|
||||||||
Ian
Warwick
Chief
Executive Officer
and
Chairman
|
4,561,452 | 5.31 | % | |||||
Simon
Chadwick
Chief
Operating Officer
|
1,961,084 | 2.28 | % |
(1)
|
Based
on a total of 85,860,185 shares of Common Stock outstanding as of July 26,
2010. In accordance with Securities and Exchange Commission rules, each
person’s percentage interest is calculated by dividing the number of
shares that person owns by the sum of (a) the total number of shares
outstanding as of July 26, 2010 plus (b) the number of shares such person
has the right to acquire within sixty (60) days of July 26,
2010.
|
80
(2)
|
Comprised
of Wynnefield Partners Small Cap Value, LP (“Wynnefield Partners”) and
Wynnefield Partners Small Cap Value LP I (“Wynnefield Partners I”), and
the general partner of each of these entities, Wynnefield Capital
Management, LLC (“Wynnefield LLC”); Wynnefield Small Cap Value Offshore
Fund Ltd. (“Wynnefield Offshore”) and its investment manager, Wynnefield
Capital, Inc. (“Wynnefield Capital”); Wynnefield Capital, Inc. Profit
Sharing & Money Purchase Plan (the “Plan”); Channel Partnership II, LP
(“Channel”); Nelson Obus, who serves as principal and co-managing member
of Wynnefield Capital Management, LLC, principal executive officer of
Wynnefield Capital, Inc. and general partner of Channel Partnership II,
LP; and Joshua H. Landes, who serves as principal and co-managing member
of Wynnefield Capital Management, LLC and executive officer of Wynnefield
Capital, Inc. (collectively, the “Wynnefield Persons”). Dwight Mamanteo,
one of the Company’s directors, is an investment analyst with Wynnefield
Capital. Mr. Mamanteo exercises neither voting nor dispositive control
over the shares beneficially owned by Wynnefield Capital. The Company has
been informed that Nelson Obus and Joshua H. Landes share voting and
investment control over the shares beneficially owned by Wynnefield
Partners, Wynnefield Partners I, Wynnefield Offshore, Wynnefield LLC,
Wynnefield Capital and the Plan, and that Nelson Obus exercises sole
voting and investment control over the shares beneficially owned by
Channel. Based upon information provided in a Schedule 13D/A
filed with the SEC on April 3, 2009 and a Form 4 filed on May 22,
2009. Note that the Wynnefield Persons’ shareholdings have been
reduced by an aggregate of 3,125,002 shares to reflect the surrender of
the Exchange Warrants by the Wynnefield Partners Small Cap Value, LP,
Wynnefield Partners Small Cap Value, LP I, Wynnefield SmallCap Offshore
Fund, Ltd and Channel Partnership II, LP to the Company as part of the
Company’s proposed Exchange Offer.
|
(3)
|
Represents
an aggregate of 10,829,479 shares of common stock, which are beneficially
owned as follows: (i) 3,102,885 shares of common stock are beneficially
owned by Wynnefield Partners; (ii) 2,525,615 shares of common stock are
beneficially owned by Wynnefield Partners I; (iii) 4,559,115 shares of
common stock; (iv) 16,864 shares of common stock are beneficially owned by
the Wynnefield Capital, Inc. Profit Sharing & Money Purchase Plan; and
(v) 625,000 shares of common stock are beneficially owned by
Channel. Based upon information provided in a Form 4 filed with
the SEC on May 22, 2009.
|
(4)
|
Comprised
of Little Wing, L.P. (“Little Wing”); Quilcap Corp., the general partner
of Little Wing (“Quilcap Corp.”); Tradewinds Fund, Ltd. (“Tradewinds”);
Quilcap Management, LLC, the investment manager of Little Wing and
Tradewinds (“Quilcap Management”); and Parker Quillen, the President of
Quilcap Corp. and the Sole Managing Member of Quilcap Management
(collectively, the “Quillen Persons”). Based upon information
provided in a Schedule 13G/A filed with the SEC on February 13,
2009.
|
(5)
|
Represents
(i) 5,976,508 shares of common stock owned by Little Wing, with respect to
which Little Wing has the power to vote and dispose, which power may be
exercised by Mr. Quillen, as President of Quilcap Corp and as Sole
Managing Member of Quilcap Management; and (ii) 540,879 shares of common
stock owned by Tradewinds, with respect to which Tradewinds has the power
to vote and dispose, which power may be exercised by Mr. Quillen, as the
Sole Managing Member of Quilcap Management; and (iii) 26,058 shares
of common stock with respect to which Mr. Quillen has sole voting and
dispositive power. Based upon information provided in a
Schedule 13G/A filed with the SEC on February 13,
2009.
|
81
(6)
|
Includes
the following shares owned by ComVest Capital LLC: (i) 1,000,000 shares
issuable upon exercise of warrants to purchase shares of Common Stock,
which are currently exercisable at $0.1097 per share and expire December
31, 2013; (ii) 2,083,333 shares issuable upon exercise of warrants to
purchase shares of Common Stock, which are currently exercisable at
$0.3595 per share and expire December 31, 2013; (iii) 2,000,000 shares
issuable upon exercise of warrants to purchase shares of Common Stock,
which are currently exercisable at $0.1097 per share and expire December
31, 2013, and (iv) 3,386,616 shares of common stock issuable upon
conversion of the $5,000,000 principal amount of that certain Convertible
Term Note dated December 21, 2007 issued to Comvest Capital LLC, at a
current conversion rate of $1.4764 per share. The Company has been
informed that Comvest Capital Advisors, LLC is the managing entity of
ComVest Capital, LLC, and that Gary Jaggard, managing director of Comvest
Capital, LLC, exercises voting and investment control over the shares
beneficially owned by ComVest Capital, LLC. See “Certain Relationships and
Related Transactions and Director Independence” for additional
detail.
|
(7)
|
Includes
780,000 vested shares of an award of an aggregate of 1,000,000 restricted
shares of Common Stock granted by the Company on May 13, 2008 for services
previously rendered.
|
(8)
|
Includes
585,000 vested shares of an award of an aggregate 750,000 restricted
shares of Common Stock granted by the Company on May 13, 2008 for services
previously rendered.
|
(9)
|
Includes
(i) 19,500 vested shares of restricted Common Stock of an award for an
aggregate 25,000 shares of restricted Common Stock granted on May 13, 2008
by the Company for services previously rendered; (ii) 73,336 vested shares
of restricted Common Stock out of an award of an aggregate of 110,000
shares of restricted Common Stock granted on October 6, 2008; and (iii)
68,181 vested shares of restricted Common Stock out of an award of an
aggregate of 204,545 shares of restricted Common Stock granted on July 1,
2009, and (iv) 49,650 shares which will vest within 60 days of August 11,
2010.
|
(10)
|
Includes
(i) 19,500 vested shares of restricted Common Stock of an award for an
aggregate 25,000 shares of restricted Common Stock granted on May 13, 2008
by the Company for services previously rendered; and (ii) 51,137 vested
shares of restricted Common Stock (net of taxes) out of an award of an
aggregate of 104,000 shares of restricted Common Stock granted on October
6, 2008; and (iii) 58,106 vested shares of restricted Common Stock (net of
taxes) out of an award of an aggregate of 236,364 shares of restricted
Common Stock granted on July 1, 2009, and (iv) 55,447 shares which will
vest within 60 days of August 11,
2010.
|
(11)
|
Includes
(i) 19,500 vested shares of restricted Common Stock of an award for an
aggregate 25,000 shares of restricted Common Stock granted on May 13, 2008
by the Company for services previously rendered; (ii) 69,336 vested shares
of restricted Common Stock out of an award of an aggregate of 104,000
shares of restricted Common Stock granted on October 6, 2008; and (iii)
62,936 vested shares of restricted Common Stock (net of taxes) out of an
award of an aggregate of 190,909 shares of restricted Common Stock granted
on July 1, 2009, and (iv) 46,451 shares which will vest within 60 days of
August 11, 2010.
|
82
(12)
|
Includes
(i) 13,333 vested shares of restricted Common Stock (net of taxes) out of
an award for an aggregate 25,000 shares of restricted Common Stock granted
by the Company for joining the Board of Directors on October 6, 2008; (ii)
79,892 vested shares of restricted Common Stock (net of taxes) out of an
award of an aggregate of 140,000 shares of restricted Common Stock granted
on October 6, 2008; and (iii) 68,940 vested shares of restricted Common
Stock (net of taxes) out of an award of an aggregate of 318,182 shares of
restricted Common Stock granted on July 1, 2009, and (iv) 76,030 shares
which will vest within 60 days of August 11,
2010.
|
(13)
|
W.
Austin Lewis IV is the portfolio manager and general partner of Lewis
Asset Management Corp., the investment manager of Lewis Opportunity Fund,
LP and LAM Opportunity Fund, LTD. Accordingly, Mr. Lewis is deemed to
be the beneficial owner of the shares owned by Lewis Opportunity Fund, LP
and LAM Opportunity Fund, LTD. and beneficially owned by Lewis Asset
Management Corp.
|
(14)
|
Represents
(i) 3,614,353 shares owned directly by W. Austin Lewis IV, (ii) 5,322,646
shares of common stock owned by Lewis Opportunity Fund, LP; (iii)
1,348,719 shares of common stock owned by LAM Opportunity Fund, LTD.; (iv)
14,000 vested shares of restricted Common Stock out of an award of an
aggregate of 25,000 shares of restricted Common Stock granted on February
20, 2009; (v) 36,935 vested shares of restricted Common Stock out of an
award of an aggregate 80,000 shares of restricted Common Stock granted on
February 20, 2009; and (vi) 60,607 vested shares of restricted Common
Stock out of an award of an aggregate of 181,818 shares of restricted
Common Stock granted on July 1, 2009, and (vii) 49,319 shares which will
vest within 60 days of August 11, 2010. Note that Mr. Lewis’
shareholdings have been reduced by an aggregate of 6,402,999 shares to
reflect the surrender of the Exchange Warrants by Lewis Opportunity Fund,
LP and LAM Opportunity Fund Ltd. to the Company as part of the Company’s
proposed Exchange Offer.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Transactions with Auto Data Network,
Inc.
Prior to
the spin-off of Aftersoft from ADNW on November 24, 2008, Mr. Warwick served as
Chairman and CEO of both companies. Effective immediately following the spinoff,
Mr. Warwick resigned from all positions with ADNW. None of the Company’s other
officers and directors serve as officers or directors of ADNW.
83
On
November 24, 2008 (the “Dividend Distribution Date”), ADNW distributed a
dividend of the 71,250,000 shares of the Company’s common stock that ADNW owned
at such time in order to complete the previously announced spin-off of
Aftersoft’s businesses. The dividend shares were distributed in the form of a
pro rata dividend to the holders of record as of November 17, 2008 (the
“Record Date”) of ADNW’s common and convertible preferred stock. Each holder of
record of shares of ADNW common and preferred stock as of the close of business
on the Record Date was entitled to receive 0.6864782 shares of Aftersoft's
common stock for each share of common stock of ADNW held at such time, and/or
for each share of ADNW common stock that such holder would own, assuming the
convertible preferred stock owned on the Record Date was converted in
full.
Due to
the nature of the dividend distribution, the ex-dividend date was set by NASDAQ
as Tuesday, November 25, 2008, one day following the Dividend Distribution Date.
No consideration was paid by any ADNW shareholder to receive the distribution of
the dividend shares. Only whole shares were delivered to ADNW shareholders, so
any resulting fractional shares in calculating the dividend were rounded up to
the nearest whole number.
As a
result of Aftersoft’s ownership of certain ADNW securities, Aftersoft received
approximately 13,965,295 shares of its own common stock in connection with the
dividend distribution. On December 31, 2008, Aftersoft retired 13,722,112
of the shares. The remaining 243,183 shares were used by Aftersoft for
rounding of fractional shares issued in respect of the spin-off dividend, to
make adjustments for the benefit of the holders of ADNW’s Series B Convertible
Preferred Stock which received fewer shares in connection with the spin-off than
the number to which they were entitled as a result of a calculation error
relating to the Series B conversion rate, and for other minor
adjustments.
Prior to
the spin-off, ADNW owned approximately 77% of Aftersoft’s issued and outstanding
common stock. Subsequent to and as a result of the spin-off, Aftersoft is no
longer a subsidiary of ADNW.
Transactions
with ComVest Capital LLC and its affiliate, Commonwealth Associates
LP
ComVest
Capital LLC
ComVest
Capital LLC (“ComVest”) is the Company’s senior secured
lender. During fiscal 2008, ComVest extended to the Company a
$1,000,000 secured revolving credit facility and a $5,000,000 term loan pursuant
to the terms of a Revolving Credit and Term Loan Agreement (the “Loan
Agreement”), a Revolving Credit Note and a Convertible Term Note, each dated
December 21, 2007. The material terms of these loans are described
further below. In connection with this transaction, the Company issued to
ComVest warrants to purchase an aggregate of 5,083,333 shares of the Company’s
common stock. The material terms of these warrants are described further
below.
84
At the
time the loans were made, ComVest was not a party related to the Company. Each
of these loans were made in the ordinary course of business, were made on the
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable loans with persons not related to the
lender and did not involve more than the normal risk of collectibility or
present other unfavorable features. As a result of the issuance of
the Convertible Term Note and the warrants, ComVest became a shareholder of the
Company, and currently may be deemed to have beneficial ownership of
approximately 10.79% of the Company’s common stock (including certain
warrants held by Commonwealth Associates LP, see below).
Credit
Facility and Revolving Credit Note. Pursuant to the terms of the Loan Agreement,
the Credit Facility is available to the Company through November 30, 2009,
unless the maturity date is extended, or the Company prepays the Term Loan
(described below) in full, in each case in accordance with the terms of the Loan
Agreement. The Credit Facility provides for borrowing capacity of an amount up
to (at any time outstanding) the lesser of the Borrowing Base at the time of
each advance under the Credit Facility, or $1,000,000. The borrowing base
at any time will be an amount determined in accordance with a borrowing base
report that the Company is required to provide to the lender, based upon the
Company’s Eligible Accounts and Eligible Inventory, as such terms are defined in
the Loan Agreement. The Loan Agreement provides for advances to be
limited to (i) 80% of Eligible Accounts plus, in ComVest’s sole discretion, (ii)
40% of Eligible Inventory, minus (iii) such reserves as ComVest may establish
from time to time in its discretion. As of June 30, 2009, the
borrowing base was $1,385,000.
In
connection with the Credit Facility, the Company issued a Revolving Credit Note
(the “Credit Note”) on December 21, 2007 payable to ComVest in the principal
amount of $1,000,000, initially bearing interest at a rate per annum equal to
the greater of (a) the prime rate, as announced by Citibank, N.A. from time to
time, plus two percent (2%), or (b) nine and one-half percent (9.5%). The
applicable interest rate will be increased by four hundred (400) basis points
during the continuance of any event of default under the Loan Agreement.
Interest is computed on the daily unpaid principal balance and is payable
monthly in arrears on the first day of each calendar month commencing
January 1, 2008. Interest is also payable upon maturity or
acceleration of the Credit Note. On June 17, 2010, the interest rate
was increased from 9.5% to 13.5% for an event of default under the Loan
Agreement.
During
the Company’s fourth fiscal quarter of 2008, the Company drew down $500,000 of
the Credit Facility, and drew down the remaining $500,000 during the first and
second fiscal quarter of 2009. As a result, as of June 30, 2009, the
outstanding principal due on the credit facility was $1,000,000, and as of June
30, 2009, the entire credit facility had been drawn down. As of June
30, 2009, the Company has not yet repaid any principal. As described
above, this loan currently bears interest at a rate of 13.5%. During
fiscal 2008, the Company paid $2,045 in interest payments, and during fiscal
2009, the Company paid $117,281 including fees of $27,000.
85
Term Loan
and Convertible Term Note. In addition to the Credit Facility,
ComVest extended a Term Loan, evidenced by a Convertible Term Note (the “Term
Note”) issued on December 21, 2007, in the principal amount of $5,000,000. The
Term Loan was a one-time loan, and unlike the Credit Facility, the principal
amount is not available for re-borrowing. The Term Note bears
interest at a rate of eleven percent (11%) per annum, except that during the
continuance of any event of default, the interest rate will be increased to
sixteen percent (16%). On June 17, 2010, the interest rate was
increased to 16% for an event of default under the Loan Agreement.
Initially,
the Term Note was payable in 23 equal monthly installments of $208,333 each,
payable on the first day of each calendar month commencing January 1, 2009,
through November 1, 2010, with the balance due on November 30,
2010. The amortization schedule was subsequently modified, and was
delayed for one year so that payments will commence on January 1, 2010,
pursuant to an amendment of the Loan Agreement during the quarter ended June 30,
2008 (see below).
The
number of shares issuable upon conversion of the Term Note and the conversion
price may be proportionately adjusted in the event of any stock dividend,
distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar transaction. In
addition, the number of conversion shares, and/or the conversion price may be
adjusted in the event of certain sales or issuances of shares of the Company’s
common stock, or securities entitling any person to acquire shares of common
stock, at any time while the Term Note is outstanding, at an effective price per
share which is less than the then-effective conversion price of the Term
Note. The principal and interest payable on the Term Note was initially
convertible into shares of the Company’s common stock at the option of ComVest,
at an initial conversion price of $1.50 per share. On July 3, 2008, the
conversion price was reduced to approximately $1.49 per share following the
Company’s subsequent issuance of shares of common stock and warrants at an
effectively lower price. Consequently, the number of shares issuable
upon conversion of the principal amount of the Term Note was increased to
3,361,345 shares from 3,333,333 shares. The Company also may require conversion
of the principal and interest under certain circumstances.
Since
December 21, 2007, the principal amount due on the Term Note has been
$5,000,000. As of June 30, 2009, the Company has not yet repaid any principal.
As described above, this loan currently bears interest at a rate of 16%. During
fiscal 2009 and 2008, the Company paid $842,000 and $290,278, respectively, in
interest payments.
86
Warrants. In connection with the
Loan Agreement, the Company issued warrants to ComVest to purchase the following
amounts of shares of the Company’s common stock, exercisable after December 21,
2007 and expiring December 31, 2013: a) warrants to purchase 1,000,000 shares of
common stock at an initial exercise price of $0.3125 per share; b)
warrants to purchase 2,000,000 shares of common stock at an initial exercise
price of $0.39 per share; and c) warrants to purchase 2,083,333 shares of the
Company’s common stock at an initial exercise price of $0.3625 per
share. The warrants also contain a cashless exercise
feature. The number of shares of common stock issuable upon exercise
of the warrants, and/or the applicable exercise prices, may be
proportionately adjusted in the event of any stock dividend, distribution, stock
split, stock combination, stock consolidation, recapitalization or
reclassification or similar transaction. In addition, the number of shares
issuable upon exercise of the warrants, and/or the applicable exercise
prices may be adjusted, at any time while the warrants are outstanding, in the
event of certain issuances of shares of the Company’s common stock, or
securities entitling any person to acquire shares of the Company’s common stock,
at an effective price per share which is less than the then-effective exercise
prices of the warrants.
The
exercise prices for 3,000,000 of these warrants were subsequently modified in
connection with waivers the Company received for violations of one of the debt
covenants, as discussed further below.
Debt
Covenants. The Loan Agreement contains customary affirmative and
negative covenants, including:
(a) Maximum
limits for capital expenditures of $600,000 per fiscal year;
(b) Limitation
on future borrowings, other than in certain circumstances, including to finance
capital expenditures;
(c) Limitation
on guaranteeing any obligation, except for obligations in the ordinary course of
business and obligations of the Company’s wholly owned subsidiaries incurred in
the ordinary course of business;
(d) Limitation
on entering Sales-Leaseback Transactions with respect to the sale or transfer of
property used or useful in the Company’s business operations;
(e) Limitation
on acquiring securities or making loans;
(f) Limitation
on acquiring real property;
(g) Limitation
on selling assets of the Company or permitting any reduction in the Company’s
ultimate ownership position of any subsidiary;
(h) Limitation
on paying dividends;
(i) Limitation
on selling any accounts receivable; and
(j) Requiring
that, at the end of any quarter of any fiscal year, the ratio of (a) Earnings
Before Interest, Depreciation, and Amortization (“EBIDA”) minus capital
expenditures incurred to maintain or replace capital assets, to (b) debt service
(all interest and principal payments), for the four (4) consecutive quarters
then ended, to be not less than 1.25 to 1.00 (the “EBIDA Ratio
Covenant”).
The Loan
Agreement is collateralized by a pledge of all of the Company’s assets and the
stock of the Company’s subsidiaries.
87
Amendments
to Loan Agreement and Waivers for Violations of Certain
Covenants. Subsequent to March 31, 2008, the Company notified ComVest
that the Company had incurred a loss of $1,897,000 for the three-month period
ending March 31, 2008, and as a result, the Company had a ratio of EBIDA to debt
service of (4.41):1.00, therefore violating the EBIDA Ratio Covenant described
above. ComVest agreed to grant the Company a waiver for the violation
of this loan covenant. On May 15, 2008, the Company and ComVest
entered into a Waiver and Amendment pursuant to which ComVest granted the
waiver, and, in consideration therefor, the Company reduced the exercise price
for 1,000,000 warrants issued to ComVest in connection with the Loan Agreement
from $0.3125 per share to $0.11 per share, and recognized the incremental fair
value of the modified warrants of $24,000 as additional interest
expense. As a result of ComVest granting this waiver, the
Company was not in violation of any loan covenants at March 31,
2008.
Subsequent
to June 30, 2008, the Company advised ComVest that the Company had incurred
a loss of $11,664,000 for the six-month period ending June 30, 2008, and that as
a result had again violated the EBIDA Ratio Covenant with an EBIDA to debt
service ratio of (2.26):1.00. ComVest agreed to provide the Company
with another waiver. In connection therewith, the Company and ComVest
entered into a letter agreement amending the Loan Agreement (the “September 23,
2008 Waiver and Amendment”) and modifying the EBIDA Ratio Covenant.
Pursuant to the September 23, 2008 Waiver and Amendment, the EBIDA Ratio
Covenant was waived for the quarter ending September 30, 2008 and was reduced to
0.62:100 from 1.25:1.00 for the quarter ended December 31,
2008. Additionally, the EBIDA Ratio Covenant was reset for future quarters
to 0.71:1.00 for the four quarters ended March 31, 2009; 0.50:1.00 for the four
quarters ended June 30, 2009; and 1.25:1.00 for the four quarters ended
September 30, 2009 and thereafter. Additionally, ComVest agreed to
delay the commencement of the loan amortization related to the Term Note for one
year, from January 1, 2009 to January 1, 2010. In consideration for
these modifications, the Company reduced the exercise price related to 2,000,000
warrants issued to ComVest in connection with the Loan Agreement from $0.39 to
$0.11. The incremental fair value of the modified warrants is
$15,000, which was recorded as an additional debt discount and is being
amortized over the remaining life of the term loan pursuant to EITF 96-19,
“Debtor's Accounting for a Modification or Exchange of Debt
Instruments.” As a result of these amendments, the Company was not in
violation of any loan covenants at June 30, 2008.
88
Subsequent
to the end of the quarter ended December 31, 2008, the Company advised ComVest
that it had incurred a net loss of $5,349,000 for the six-month period
ended December 31, 2008, and that as a result, the Company’s ratio of EBIDA to
debt service was (1.41):1.00 in violation of the amended EBIDA Ratio
Covenant. ComVest agreed to extend an additional waiver of this
covenant, which was granted on February 10, 2009, under a Waiver and Amendment
#2 letter agreement (the “February 10, 2009 Waiver and
Amendment”). In consideration for the waiver, the Company agreed to
increase the interest rate on the $1,000,000 Credit Facility from 9.5% to
11%. As a result of ComVest granting this waiver, the Company was not in
violation of any loan covenants at December 31, 2008. If the Company restores
compliance with the EBIDA Ratio Covenant as of the close of any quarter ending
on or after March 31, 2009, then the annual interest rate will be restored to
9.5%, effective as of the first day of the calendar month next succeeding the
Company’s demonstrated quarter-end compliance with such covenant. Pursuant to a
waiver and amendment, the annual interest rate was be restored to 9.5% as the
Company became compliant with the covenant as of the close of the quarter ending
on March 31, 2009. Following such modification, the Company is in compliance
with the loan covenants, and accordingly, the interest rate on the Credit
Facility was decreased from 11% to 9.5%, effective April 1, 2009.
After
obtaining the above-described waivers, the Company is not in violation of the
loan covenants at June 30, 2009.
As of
March 31, 2010, the Company did not meet the EBIDA Ratio Covenant of 1.25:1 as
required by the Loan Agreement, and Amendment. Our failure to
maintain this ratio constitutes an event of default under the terms of the
Loan Agreement. Under the terms of the Loan Agreement, if any event of default
occurs, the full principal amount of the Note, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall become, at
ComVest’s election, immediately due and payable in cash. The
Company has entered into a forbearance agreement to resolve the default with
ComVest.
Commonwealth
Associates LP
The
Company has engaged Commonwealth Associates LP (“Commonwealth”) as its
consultant and exclusive merger and acquisitions advisor pursuant to a
Consulting Agreement dated June 3, 2008 (the “Consulting Agreement”).
Commonwealth and ComVest are entities that are under common control. The
Consulting Agreement is for an initial term of 24 months, and provides that
Commonwealth will (i) be issued warrants to purchase up to 3,000,000 shares of
the Company’s common stock, which will be exercisable for 5 years at a price of
$0.30 per share, or the effective price for the Company’s shares resulting from
the sale of approximately 28,631,622 shares of ADNW’s common stock with respect
to which Commonwealth may act as placement agent, whichever is lower, and will
contain anti-dilution protection and a cashless exercise feature with respect to
one-half of the warrants; (ii) receive $15,000 per month for 18 months for
its advisory services beginning June 3, 2008 and (iii) receive a fee in
connection with an M&A transaction equal to 5% of the aggregate
consideration paid or received by the Company.
89
On July
3, 2008, the Company issued to Commonwealth warrants to purchase an aggregate of
1,000,000 shares of the Company’s common stock as compensation for work
performed in connection with the Company’s sale on July 3, 2008 of the 5,231,622
shares of ADNW common stock that it owned, which is further described in the
footnotes. The warrants are currently exercisable at an exercise price of $0.30
per share and expire on July 3, 2013. Additionally, during the year ended June
30, 2009, the Company paid $45,000 to Commonwealth, and recorded a
liability for unpaid fees of $135,000.
On August
3, 2009, the Company amended the financial advisory agreement and agreed to pay
Commonwealth $35,000 in August, and $25,000 in September and October of 2009, in
full satisfaction of the $135,000 liability.
On
December 31, 2009, the Company issued to Commonwealth, in settlement of a
contract, warrants to purchase an aggregate of 700,000 shares of the Company’s
common stock. The warrants are exercisable at $0.08 per share and
expire on December 31, 2014.
Director
Independence
Our
determination of independence of directors is made using the definition of
“independent director” contained in Rule 5605(a)(2) of the Marketplace Rules of
the NASDAQ Stock Market (“NASDAQ”), even though such definitions do not
currently apply to us because we are not listed on NASDAQ. We have determined
that Dwight B. Mamanteo, Marcus Wohlrab, Frederick Wasserman and Gerald
Czarnecki are “independent” within the meaning of such rules. Michael
Jamieson is not “independent” under these rules, due to his position as our
Chief Executive Officer.
Item
14.
|
Principal
Accounting Fees and Services.
|
For the Year Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Audit
fees (1)
|
$
|
123,200
|
$
|
175,000
|
||||
Audit-
related fees (2)
|
-
|
56,400
|
||||||
Tax
fees (3)
|
-
|
11,900
|
||||||
All
other fees
|
9,900
|
–
|
||||||
Total
fees
|
$
|
133,100
|
$
|
243,300
|
90
(1)
|
Audit
fees are comprised of annual audit fees and quarterly review
fees.
|
(2)
|
Audit-related
fees for fiscal years 2010 and 2009 are comprised of consent fees and work
on registration statements, consultation fees on accounting issues, and
fees related to the restatements of the fiscal 2008 quarterly reports that
were filed in fiscal 2009.
|
(3)
|
Tax
fees are comprised of tax compliance, preparation and consultation
fees.
|
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The Audit
Committee pre-approves all audit and non-audit services provided by the
independent auditors prior to the engagement of the independent auditors with
respect to such services. The Chairman of the Audit Committee has been delegated
the authority by the Committee to pre-approve interim services by the
independent auditors other than the annual audit. The Chairman must report all
such pre-approvals to the entire Audit Committee at the next Committee
meeting.
PART
IV
Item
15.
|
Exhibits,
Financial Statement
Schedules.
|
(a)
Exhibits:
The
following exhibits are filed herewith or incorporated by reference
herein.
Description of Exhibit
|
||
3(i)
|
Certificate
of Incorporation of MAM Software Group, Inc., as amended (incorporated by
reference to Exhibit 3(i) to the Company’s Registration Statement on Form
S-1/A filed on July 15, 2008).
|
|
3(ii)
|
By
laws (incorporated by reference to Exhibit 3(ii) to the Company’s
Registration Statement on Form SB-2 filed on February 16,
2007).
|
|
4.1
|
Form
of Certificate of Common Stock (incorporated by reference to Exhibit 4.1
to the Company’s Registration Statement on Form SB-2 filed on February 16,
2007).
|
|
10.1
|
Share
Sale Agreement relating to EXP Dealer Software Limited dated August 4,
2006 among Auto Data Network, Inc., MAM Software Group, Inc. and MAM
Software Dealer Software Limited (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on August 31,
2006).
|
91
10.2
|
Share
Sale Agreement relating to Dealer Software and Services Limited dated
February 1, 2007 between MAM Software Group, Inc. and Auto Data Network,
Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on February 7, 2007).
|
|
10.4
|
Form
of Common Stock Purchase Warrant (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed July 6,
2007).
|
|
10.5
|
Form
of Registration Rights Agreement (incorporated by reference to Exhibit
10.3 to the Company’s Current Report on Form 8-K filed July 6,
2007).
|
|
10.6
|
Settlement
and Release Agreement between ASNA and Aidan J. McKenna (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed August 6, 2007).
|
|
10.7
|
Share
Sale Agreement, dated November 12, 2007, between EU Web Services, Ltd., as
Purchaser, MAM Software Group, Inc., as Vendor, and EXP Dealer Software
Ltd. (incorporated by reference to Exhibit 99.1 of the Company’s Current
Report on Form 8-K filed November 16, 2007)
|
|
10.8
|
Revolving
Credit and Term Loan Agreement dated as of December 21, 2007, by and
between ComVest Capital LLC, as Lender, and MAM Software Group, Inc., as
Borrower (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K filed December 31, 2007).
|
|
10.9
|
Revolving
Credit Note dated December 21, 2007 in the principal amount of $1,000,000
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report
on Form 8-K filed December 31, 2007).
|
|
10.10
|
Convertible
Term Note, dated December 21, 2007 in the principal amount of $5,000,000
(incorporated by reference to Exhibit 10.3 of the Company’s Current Report
on Form 8-K filed December 31, 2007).
|
|
10.11
|
Collateral
Agreement dated as of December 21, 2007 by and among MAM Software Group,
Inc., Aftersoft Network, N.A. Inc., MAM Software Ltd., MAM Software Group
(UK) Ltd., AFS Warehouse Distribution Management, Inc., AFS Tire
Management, Inc. and AFS Autoservice Inc., and ComVest Capital LLC
(incorporated by reference to Exhibit 10.4 of the Company’s Current Report
on Form 8-K filed December 31,
2007).
|
92
Guaranty
Agreement dated December 21, 2007 by Aftersoft Network, N.A. Inc., MAM
Software Ltd., MAM Software Group (UK) Ltd., AFS Warehouse Distribution
Management, Inc., AFS Tire Management, Inc. and AFS Autoservice Inc., in
favor of ComVest Capital LLC (incorporated by reference to Exhibit 10.5 of
the Company’s Current Report on Form 8-K filed December 31,
2007).
|
||
10.13
|
Form
of Validity Guaranty (incorporated by reference to Exhibit 10.6 of the
Company’s Current Report on Form 8-K filed December 31,
2007).
|
|
10.14
|
Warrant,
dated as of December 21, 2007, to Purchase 1,000,000 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.7 of the Company’s Current Report on Form 8-K filed December 31,
2007).
|
|
10.15
|
Warrant,
dated as of December 21, 2007, to purchase 2,000,000 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.8 of the Company’s Current Report on Form 8-K filed December 31,
2007).
|
|
10.16
|
Warrant,
dated as of December 21, 2007, to purchase 2,083,333 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.9 of the Company’s Current Report on Form 8-K filed December 31,
2007).
|
|
10.17
|
Registration
Rights Agreement dated as of December 21, 2007 by MAM Software Group, Inc.
for the benefit of the holders (incorporated by reference to Exhibit 10.10
of the Company’s Current Report on Form 8-K filed December 31,
2007).
|
|
10.18
|
2007
Long-Term Stock Incentive Plan (incorporated by reference to Exhibit D of
the Company’s revised Definitive Proxy Statement filed on May 19,
2008).
|
|
10.19
|
Employment
Agreement dated as of December 1, 2008 between the Company and Ian Warwick
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 5,
2008).
|
93
10.20
|
Employment
Agreement dated as of December 1, 2008 between the Company and Charles F.
Trapp (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed December 5, 2008).
|
|
10.21
|
Employment
Agreement dated as of December 1, 2008 between the Company and Simon
Chadwick (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K filed December 5, 2008).
|
|
10.22
|
May
15, 2008 Waiver and Amendment (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K filed March 27,
2009).
|
|
10.23
|
September
23, 2008 Waiver and Amendment (incorporated herein by reference to Exhibit
10.2 of the Company’s Current Report on Form 8-K filed March 27,
2009).
|
|
10.24
|
February
10, 2009 Waiver and Amendment (incorporated herein by reference to Exhibit
10.3 of the Company’s Current Report on Form 8-K filed March 27,
2009).
|
|
10.25
|
April
22, 2009 Amendment (incorporated by reference to Exhibit 10.1 of the
Company’s current Report on Form 8-K filed April 23,
2009).
|
|
10.26
|
Consulting
Agreement with Commonwealth Associates LP dated June 3, 2008 (incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1/A filed on April 3, 2009).
|
|
14
|
Code
of Ethics (incorporated by reference to Exhibit 14 to the Company’s Annual
report on Form 10-K/A for the fiscal year ended June 30, 2007 filed
October 15, 2007.)
|
|
List
of subsidiaries (incorporated by reference to Exhibit 21 to the Company’s
Registration Statement on Form S-1/A filed on July 15,
2008).
|
||
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
94
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MAM
Software Group, Inc.
|
||
Date:
September 16, 2010
|
By:
|
/s/Michael G. Jamieson
|
Michael
G. Jamieson
|
||
Chief
Executive Officer
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date:
September 16, 2010
|
By:
|
/s/ Michael G. Jamieson
|
Michael
G. Jamieson
|
||
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
||
Date:
September 16, 2010
|
By:
|
/s/ Charles F. Trapp
|
Charles
F. Trapp
|
||
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer)
|
||
Date:
September 16, 2010
|
By:
|
/s/
Gerald M. Czarmecki
|
Gerald
M. Czarnecki
|
||
Chairman
of the Board, Lead Director,
ex officio member of
all committees
|
||
Date:
September 16, 2010
|
By:
|
/s/ Frederick Wasserman
|
Frederick
Wasserman
|
||
Audit
Committee Chair and Director
|
||
Date:
September 16, 2010
|
By:
|
/s/ Dwight Mamanteo
|
Dwight
Mamanteo
|
||
Compensation
Committee Chair and
Director
|
||
Date:
September 16, 2010
|
By:
|
/s/ Marcus Wohlrab
|
Marcus
Wohlrab
|
||
Governance
Committee Chair and
Director
|
||
Date:
September 16, 2010
|
By:
|
/s/ W. Austin Lewis IV
|
W.
Austin Lewis IV
|
||
Compensation
Committee Member and
Director
|
FINANCIAL
STATEMENTS
MAM
SOFTWARE GROUP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009
Index
to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F–1
|
|
Consolidated
Balance Sheets as of June 30, 2010 and 2009
|
F–2
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the years
ended June 30, 2010 and 2009
|
F–3
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended June 30, 2010 and
2009
|
F–4
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2010 and
2009
|
F–5
|
|
Notes
to Consolidated Financial Statements
|
|
F–7
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
MAM
Software Group, Inc.
We have
audited the accompanying consolidated balance sheets of MAM Software Group, Inc.
(a Delaware corporation) and subsidiaries (the “Company”) as of June 30,
2010 and 2009, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MAM Software Group, Inc. and
subsidiaries as of June 30, 2010 and 2009, and the results of their operations
and their cash flows for years then ended, in conformity with accounting
principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 1
to the consolidated financial statements, the Company has an accumulated deficit
of $23.4 million, a working capital deficit of $6.7 million as of June 30,
2010 and has $5.0 million in borrowings from a credit agreement that matures in
November 2010, which the Company will need additional financing to repay. These
items raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
As
described in Note 1 to the consolidated financial statements, on July 1,
2009, the Company adopted the accounting standard that provides guidance for
determining whether an equity-linked financial instrument, or embedded feature,
is indexed to an entity’s own stock.
/s/ KMJ
CORBIN & COMPANY LLP
Costa
Mesa, California
August 31,
2010
F-1
MAM
SOFTWARE GROUP, INC.
Consolidated
Balance Sheets
(In thousands,
except share and per share data)
June 30,
|
||||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
1,196
|
$
|
1,663
|
||||
Accounts
receivable, net of allowance of $192 and $87
|
2,520
|
2,154
|
||||||
Inventories
|
366
|
318
|
||||||
Prepaid
expenses and other current assets
|
371
|
507
|
||||||
Total
Current Assets
|
4,453
|
4,642
|
||||||
Property
and Equipment, Net
|
856
|
1,028
|
||||||
Other
Assets
|
||||||||
Goodwill
|
8,924
|
9,548
|
||||||
Amortizable
intangible assets, net
|
2,757
|
3,566
|
||||||
Software
development costs, net
|
1,520
|
1,691
|
||||||
Other
long-term assets
|
49
|
179
|
||||||
TOTAL
ASSETS
|
$
|
18,559
|
$
|
20,654
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$
|
1,551
|
$
|
1,386
|
||||
Accrued
expenses and other
|
2,368
|
3,162
|
||||||
Payroll
and other taxes
|
364
|
278
|
||||||
Current
portion of settlement liability
|
326
|
-
|
||||||
Derivative
liabilities
|
291
|
-
|
||||||
Current
portion of long-term debt
|
5,000
|
1,598
|
||||||
Current
portion of deferred revenue
|
641
|
482
|
||||||
Taxes
payable
|
647
|
708
|
||||||
Total
Current Liabilities
|
11,188
|
7,614
|
||||||
Long-Term
Liabilities
|
||||||||
Deferred
revenue, net of current portion
|
345
|
748
|
||||||
Deferred
income taxes
|
642
|
880
|
||||||
Settlement
liability, net of current portion
|
525
|
-
|
||||||
Long-term
debt, net of current portion
|
168
|
4,713
|
||||||
Other
|
359
|
199
|
||||||
Total
Liabilities
|
13,227
|
14,154
|
||||||
Commitments
and contingencies
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock: Par value $0.0001 per share; 10,000,000 shares authorized, none
issued and outstanding
|
–
|
–
|
||||||
Common
stock: Par value $0.0001 per share; 150,000,000 shares authorized,
84,862,880 and 83,462,337 shares issued and outstanding,
respectively
|
8
|
8
|
||||||
Additional
paid-in capital
|
29,503
|
30,219
|
||||||
Accumulated
other comprehensive loss
|
(768
|
)
|
(482
|
)
|
||||
Accumulated
deficit
|
(23,411
|
)
|
(23,245
|
)
|
||||
Total
Stockholders' Equity
|
5,332
|
6,500
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
18,559
|
$
|
20,654
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements .
F-2
MAM
SOFTWARE GROUP, INC.
Consolidated
Statements of Operations and Comprehensive Loss
(In
thousands, except share and per share data)
For the Year Ended
June 30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
$
|
24,156
|
$
|
21,119
|
||||
Cost
of revenues
|
10,274
|
9,496
|
||||||
Gross
Profit
|
13,882
|
11,623
|
||||||
Operating
Expenses
|
||||||||
Research
and development
|
3,012
|
2,860
|
||||||
Sales
and marketing
|
2,181
|
2,211
|
||||||
General
and administrative
|
6,462
|
5,651
|
||||||
Depreciation
and amortization
|
1,116
|
1,082
|
||||||
Impairment
of goodwill
|
-
|
850
|
||||||
Total
Operating Expenses
|
12,771
|
12,654
|
||||||
Operating
Income (Loss)
|
1,111
|
(1,031
|
)
|
|||||
Other
Income (Expense)
|
||||||||
Interest
expense
|
(1,361
|
)
|
(1,602
|
)
|
||||
Interest
income
|
-
|
21
|
||||||
Change
in fair value of derivative liabilities
|
267
|
–
|
||||||
Write
down of investments in available-for-sale securities
|
-
|
(4,723
|
)
|
|||||
Other,
net
|
50
|
98
|
||||||
Total
other expense, net
|
(1,044
|
)
|
(6,206
|
)
|
||||
Income
(loss) before provision for income taxes
|
67
|
(7,237
|
)
|
|||||
Provision
for income taxes
|
694
|
386
|
||||||
Net
Loss
|
(627
|
)
|
(7,623
|
)
|
||||
Unrealized
gain on reversal of unrealized loss on investments in
available–for–sale securities
|
-
|
184
|
||||||
Foreign
currency translation loss
|
(286
|
)
|
(2,283
|
)
|
||||
Total
Comprehensive Loss
|
$
|
(913
|
)
|
$
|
(9,722
|
)
|
||
Loss
per share attributed to common stockholders - basic and
diluted
|
$
|
(0.01
|
)
|
$
|
(0.09
|
)
|
||
Weighted
average common shares outstanding basic
and diluted
|
83,970,278
|
86,272,712
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements .
F-3
MAM
SOFTWARE GROUP, INC.
Consolidated
Statements of Stockholders’ Equity
(In
thousands, except share and per share data)
Common Stock
|
Additional
Paid-in-
|
Due
From
|
Other
Accumulated
Comprehensive
|
Accumulated
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Parent
|
Income (Loss)
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance
June 30,
2008
|
92,733,220 | $ | 9 | $ | 31,732 | $ | (2,850 | ) | $ | 1,617 | $ | (15,453 | ) | $ | 15,055 | |||||||||||||
Sale
of parent company common stock
|
– | – | 337 | 505 | – | – | 842 | |||||||||||||||||||||
Parent
company common stock issued for parent company liabilities
|
– | – | (53 | ) | 193 | – | (140 | ) | – | |||||||||||||||||||
Common
stock retired
|
(13,722,112 | ) | (1 | ) | (2,122 | ) | 2,152 | – | (29 | ) | – | |||||||||||||||||
Common
stock issued as compensation
|
4,451,229 | – | 310 | – | – | – | 310 | |||||||||||||||||||||
Fair
value of warrants issued to lender
|
– | – | 15 | – | – | – | 15 | |||||||||||||||||||||
Foreign
currency translation
|
– | – | – | – | (2,283 | ) | – | (2,283 | ) | |||||||||||||||||||
Reversal
of unrealized loss on investment in available-for-sale
securities
|
– | – | – | – | 184 | 184 | ||||||||||||||||||||||
Net
loss
|
– | – | – | – | – | (7,623 | ) | (7,623 | ) | |||||||||||||||||||
Balance
June 30, 2009
|
83,462,337 | 8 | 30,219 | – | (482 | ) | (23,245 | ) | 6,500 | |||||||||||||||||||
Adoption
of new accounting guidance related to derivative
instruments
|
- | - | (868 | ) | - | - | 461 | (407 | ) | |||||||||||||||||||
Common
stock issued as compensation
|
1,400,543 | - | 116 | - | - | - | 116 | |||||||||||||||||||||
Fair
value of warrants issued for services
|
- | - | 36 | - | — | - | 36 | |||||||||||||||||||||
Foreign
currency translation
|
- | - | - | - | (286 | ) | - | (286 | ) | |||||||||||||||||||
Net
loss
|
(627 | ) | (627 | ) | ||||||||||||||||||||||||
Balance
June 30, 2010
|
84,862,880 | $ | 8 | $ | 29,503 | $ | - | $ | (768 | ) | $ | (23,411 | ) | $ | 5,332 |
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements .
F-4
MAM
SOFTWARE GROUP, INC.
Consolidated
Statements of Cash Flows
(In thousands)
|
For the Years Ended
June 30,
|
|||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES :
|
||||||||
Net
loss
|
$
|
(627
|
)
|
$
|
(7,623
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Bad
Debt Expense
|
177
|
-
|
||||||
Depreciation
and amortization
|
1,116
|
1,082
|
||||||
Debt
discount and debt issuance cost amortization
|
513
|
699
|
||||||
Gain
on write off of liabilities
|
(50
|
)
|
(134
|
)
|
||||
Change
in fair value of derivative liabilities
|
(267
|
)
|
-
|
|||||
Write
down of investment in available - for- sale securities
|
-
|
4,723
|
||||||
Deferred
income tax
|
(238
|
)
|
-
|
|||||
Fair
value of stock issued for services and compensation
|
116
|
310
|
||||||
Warrants
issued in settlement of a service agreement
|
36
|
-
|
||||||
Impairment
of goodwill
|
-
|
850
|
||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(707
|
)
|
1,079
|
|||||
Inventories
|
(79
|
)
|
297
|
|||||
Prepaid
expenses and other assets
|
105
|
183
|
||||||
Accounts
payable
|
257
|
(852
|
)
|
|||||
Taxes
payable
|
(6
|
)
|
329
|
|||||
Deferred
revenue
|
(196
|
)
|
78
|
|||||
Accrued
expenses and other liabilities
|
515
|
(804
|
)
|
|||||
NET
CASH PROVIDED BY OPERATING
ACTIVITIES
|
665
|
217
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment
|
(85
|
)
|
(213
|
)
|
||||
Capitalized
software development costs
|
(66
|
)
|
(276
|
)
|
||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(151
|
)
|
(489
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from sale of parent company stock, net of cash issuance
costs
|
-
|
842
|
||||||
Proceeds
from long-term debt
|
-
|
500
|
||||||
Payments
on long-term debt
|
(1,346
|
)
|
(410
|
)
|
||||
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
(1,346
|
)
|
932
|
|||||
Effect
of exchange rate changes
|
365
|
(961
|
)
|
|||||
Net
change in cash and cash equivalents
|
(467
|
)
|
(301
|
)
|
||||
Cash
and cash equivalents at beginning of year
|
1,663
|
1,964
|
||||||
Cash
and cash equivalents at end of year
|
$
|
1,196
|
$
|
1,663
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements .
F-5
MAM
SOFTWARE GROUP, INC.
Consolidated
Statements of Cash Flows (Continued)
(In thousands)
|
For the Years Ended
June 30,
|
|||||||
2010
|
2009
|
|||||||
Supplemental
disclosures of cash flow information
|
||||||||
Cash
paid during the year for :
|
||||||||
Interest
|
$ | 849 | $ | 841 | ||||
Income
taxes
|
$ | 463 | $ | 873 | ||||
Non-cash
investing and financing transactions during the year for :
|
||||||||
Value of
distributed shares
|
$ | - | $ | 29 | ||||
Value
of retired shares
|
$ | - | $ | 2,123 | ||||
Cumulative
effect to retained earnings due to adoption of accounting
standard
|
$ | 461 | $ | - | ||||
Cumulative
effect to additional paid – in – capital to adoption of accounting
standard
|
$ | 868 | $ | - | ||||
Cumulative
effect to debt discount due to adoption of accounting
standard
|
$ | 310 | $ | - | ||||
Gain
on sale of Parent company common stock
|
$ | - | $ | 337 | ||||
Value
of warrants issued for amended debt covenants
|
$ | - | $ | 15 | ||||
Issuance
of debt for property, plant and equipment
|
$ | - | $ | 403 | ||||
Shares
exchanged for parent company common stock:
|
||||||||
Shares
of Parent company common stock remitted in exchange for Parent company
obligations
|
$ | - | $ | 193 | ||||
Parent
company obligations assumed by Company
|
$ | - | $ | (140 | ) | |||
Loss
on settlement of Parent company obligations
|
$ | - | $ | 53 |
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements .
F-6
MAM
SOFTWARE GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010 and 2009
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
MAM
Software Group, Inc. (“MAM” or the “Company”), formally know as Aftersoft Group,
Inc. is a former subsidiary of Auto Data Network, Inc. (“ADNW”), a publicly
traded company, the stock of which is currently traded on the pink sheets under
the symbol ADNW.PK. On November 24, 2008, ADNW distributed a dividend of the
71,250,000 shares of MAM common stock that ADNW owned at such time in order to
complete the previously announced spin-off of MAM’s businesses.
MAM is a
leading provider of business and supply chain management solutions primarily to
automotive parts manufacturers, retailers, tire and service chains, independent
installers and wholesale distributors in the automotive aftermarket. The Company
conducts its businesses through wholly owned subsidiaries with operations in
Europe and North America. MAM Software Ltd, (“MAM Ltd.”) is based in Barnsley,
United Kingdom (“UK”) and Aftersoft Network, NA, Inc., (“ASNA”) has offices in
the United States (“US”) in Dana Point, California, and Allentown,
Pennsylvania. MAM has offices in Allentown,
Pennsylvania.
Going
Concern
At June
30, 2010, the Company had cash and cash equivalents of $1,196,000, a decrease of
$467,000 from June 30, 2009. During the year ended June 30, 2010, the Company
had $151,000 of capital expenditures and made payments of $1,346,000 on debt. In
February 2010, the Company started to make payments on the $5,000,000 Term Note
(see Note 6). The payments are approximately $208,000 per month. The Company
expects to make the monthly payments on this debt and the other outstanding
obligations from operating cash flow. The Company does not expect to be able to
make the $2,917,000 balloon payment due in November 2010 on the Term Loan or to
pay off the $1,000,000 Revolver due at the same time from internally generated
cash flow. The Company currently is seeking debt and/or equity financing and
other activities to raise the necessary capital. There can be no assurances that
such funding will be available on acceptable terms, in a timely fashion or even
available at all.
F-7
The
accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring losses, an accumulated deficit of $23.4, million and a working
capital deficit of $6.7 million at June 30, 2010. These factors, along with the
amounts due in November 2010 on the Term Loan and Revolver, as discussed above,
raise substantial doubt about the Company’s ability to continue as a going
concern.
The
Company’s continuation as a going concern is dependent on its ability to obtain
additional financing. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial
statements.
Concentrations
of Credit Risk
The
Company has no significant off-balance-sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
Cash
and Cash Equivalents
The
Company maintains cash balances at financial institutions that are insured by
the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30,
2010 and 2009, the Company did not have balances in excess of the FDIC insurance
limits. For banks outside of the United States, the Company
maintains its cash accounts at financial institutions which it believes to be
credit worthy.
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents to the extent the funds are not
being held for investment purposes.
F-8
Customers
The
Company performs periodic evaluations of its customers and maintains allowances
for potential credit losses as deemed necessary. The Company generally does not
require collateral to secure its accounts receivable. Credit risk is managed by
discontinuing sales to customers who are delinquent. The Company estimates
credit losses and returns based on management’s evaluation of historical
experience and current industry trends. Although the Company expects to collect
amounts due, actual collections may differ from the estimated amounts. During
the year ended June 30, 2010, one customer accounted for approximately 10% of
the Company’s revenue. No such concentration existed during the year
ended June 30, 2009.
No
customers accounted for more than 10% or more of the Company’s accounts
receivable at June 30, 2010 and June 30, 2009.
Segment
Reporting
The
Company operates in one reportable segment. The Company evaluates
financial performance on a Company-wide basis.
Geographic
Concentrations
The
Company conducts business in the US, Canada and the UK. For customers
headquartered in their respective countries, the Company derived 27% of its
revenues from North America, and 73% from its UK operations during the year
ended June 30, 2010 compared to 28% of its revenues from North America, and 72%
from its UK operations for the year ended June 30, 2009.
At June
30, 2010, the Company maintained 62% of its net property and equipment in the UK
with the remaining 38% in the US. At June 30, 2009, the Company maintained
61% of its net property and equipment in the UK with the remaining 39% in the
US.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company’s
management include, but are not limited to, the collectibility of accounts
receivable, the realizability of inventories, the fair value of investments in
available-for-sale securities, the recoverability of goodwill and other
long-lived
assets, valuation of deferred tax assets and liabilities, the valuation of
derivative liabilities and the estimated value of warrants and shares issued for
non-cash consideration. Actual results could materially differ from those
estimates.
F-9
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash and cash
equivalents, investments in available-for-sale securities, accounts receivable,
accounts payable, accrued expenses and debt instruments.
Financial
assets and liabilities that are remeasured and reported at fair value at each
reporting period are classified and disclosed in one of the following three
categories:
|
·
|
Level
1 – Fair value based on quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level
2 – Fair value based on significant directly observable data (other than
Level 1 quoted prices) or significant indirectly observable data through
corroboration with observable market data. Inputs would normally be (i)
quoted prices in active markets for similar assets or liabilities, (ii)
quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by
observable market data.
|
|
·
|
Level
3 – Fair value based on prices or valuation techniques that require
significant unobservable data inputs. Inputs would normally be a reporting
entity’s own data and judgments about assumptions that market participants
would use in pricing the asset or
liability.
|
Available-for-Sale
Investments
Management
determines the appropriate classification of its investments in equity
securities with readily determinable fair values that are not accounted for
under the equity method of accounting at the time of purchase and re-evaluates
such classification as of each balance sheet date. The specific
identification method is used to determine the cost basis of securities disposed
of. Unrealized gains and losses on the marketable securities are included as a
separate component of accumulated other comprehensive loss, net of tax. At
June 30, 2010, investments consist of corporate stock with a carrying value of
$0. During the year ended June 30, 2009, the Company wrote down its
investment in available-for-sale securities to $0, which is now the Company’s
new cost basis in the securities. The Company will not recognize any
gain or loss on the securities unless they are sold.
F-10
Inventories
Inventories
are stated at the lower of cost or current estimated market value. Cost is
determined using the first-in, first-out method. Inventories consist primarily
of hardware that will be sold to customers. The Company periodically reviews and
records a provision for excess and obsolete inventories based primarily on the
Company’s estimated forecast of product demand and production requirements. Once
established, writedowns of inventories are considered permanent adjustments to
the cost basis of the obsolete or excess inventories.
Property
and Equipment
Property
and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the consolidated statements of operations.
Software
Development Costs
Costs
incurred to develop computer software products to be sold or otherwise marketed
are charged to expense until technological feasibility of the product has been
established. Once technological feasibility has been established, computer
software development costs (consisting primarily of internal labor costs) are
capitalized and reported at the lower of amortized cost or estimated realizable
value. Purchased software development cost is recorded at its estimated fair
market value. When a product is ready for general release, its capitalized costs
are amortized on a product-by-product basis. The annual amortization is the
greater of the amounts of: the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for
that product; and, the straight-line method over the remaining estimated
economic life (a period of three years) of the product including the period
being reported on. If the future market viability of a software product is
less than anticipated, impairment of the related unamortized development costs
could occur, which could significantly impact the recorded financial results of
the Company.
F-11
Amortizable
Intangible Assets
Amortizable
intangible assets consist of completed software technology, customer
relationships and automotive data services and are recorded at cost. Completed
software technology and customer relationships are amortized using the
straight-line method over their estimated useful lives of 8 to 10 years, and
automotive data services are amortized using the straight-line method over their
estimated useful lives of 20 years.
Goodwill
Goodwill
and intangible assets that have indefinite useful lives are not to be amortized
but rather be tested at least annually for impairment.
Goodwill
is subject to impairment reviews by applying a fair-value-based test at the
reporting unit level, which generally represents operations one level below the
segments reported by the Company. An impairment loss is recorded for any
goodwill that is determined to be impaired, which resulted in an $850,000
impairment charge in fiscal 2009. The impairment related to ASNA was
a result of continuing operating losses and less optimistic operating forecasts.
The estimated fair value of ASNA was determined using both the projected
discounted future cash flows and the market approach. There can be no assurance,
however, that market conditions will not change or demand for the Company’s
products and services will continue which could result in additional impairment
of goodwill in the future. The Company performs impairment testing on all
existing goodwill at least annually.
There was
no goodwill impairment charge for the year ended June 30, 2010.
Goodwill
activity for the years ending June 30, 2010 and 2009 are as
follows:
Balance
July 1, 2008
|
$ | 11,878,000 | ||
Effect
of exchange rate changes
|
(1,480,000 | ) | ||
Impairment
charges
|
(850,000 | ) | ||
Balance
June 30, 2009
|
$ | 9,548,000 | ||
Effect
of exchange rate changes
|
(624,000 | ) | ||
Balance
June 30, 2010
|
$ | 8,924,000 |
F-12
Long-Lived
Assets
The
Company’s management assesses the recoverability of long-lived assets (other
than goodwill discussed above) upon the occurrence of a triggering event by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. At June 30, 2010 and 2009, the
Company’s management believes there is no impairment of its long-lived assets
(other than goodwill discussed above). There can be no assurance, however, that
market conditions will not change or demand for the Company’s products and
services will continue, which could result in impairment of long-lived assets in
the future.
Issuance
of Equity Instruments to Non-Employees
All
issuances of the Company’s equity instruments to non-employees have been
assigned a per share amount equaling either the market value of the equity
instruments issued or the value of consideration received, whichever
is more readily determinable. The majority of the non-cash consideration
received pertains to services rendered by consultants and others and has been
valued at the market value of the equity instruments on the dates
issued.
The
measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement. An asset acquired in exchange for the
issuance of fully vested, non-forfeitable equity instruments not presented or
classified as an offset to equity is recorded at the market value of the equity
once the equity instrument is granted for accounting purposes.
F-13
Stock-Based
Compensation
For
valuing stock options awards, the Company has elected to use the Black-Scholes
valuation model. For the expected term, the Company uses a simple
average of the vesting period and the contractual term of the option. Volatility
is a measure of the amount by which the Company’s stock price is expected to
fluctuate during the expected term of the option. For volatility the Company
considers its own volatility as applicable for valuing its options and
warrants. Forfeitures are estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The risk-free interest rate is based on the relevant US Treasury
Bill Rate at the time each grant. The dividend yield represents the dividend
rate expected to be paid over the option’s expected term; the Company currently
has no plans to pay dividends.
On June
12, 2008, the Company’s shareholders approved the MAM Software Group, Inc. 2007
Long-Term Stock Incentive Plan (“LTIP”). The maximum aggregate number of shares
of common stock that may be issued under the plan, including stock options,
stock awards, and stock appreciation rights is limited to 15% of the shares of
common stock outstanding on the first trading day of any fiscal year. The
Company issued restricted shares to management and board members in fiscal 2010
and 2009 under this plan (see Note 9).
Revenue
Recognition
Software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectability is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met.
The
Company accounts for delivered elements in accordance with the residual method
when arrangements include multiple product components or other elements and
vendor-specific objective evidence exists for the value of all undelivered
elements. Revenues on undelivered elements are recognized once delivery is
complete.
In those
instances where arrangements include significant customization, contractual
milestones, acceptance criteria or other contingencies (which represents the
majority of the Company’s arrangements), the Company accounts for the
arrangements using contract accounting, as follows:
F-14
|
1)
|
When
customer acceptance can be estimated, expenditures are capitalized as work
in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
|
|
2)
|
When
customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is
obtained.
|
The
Company records amounts collected from customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance
sheet.
Revenues
for maintenance agreements, software support, on-line services and information
products are recognized ratably over the term of the service
agreement.
Advertising
Expense
The
Company expenses advertising costs as incurred. For the years ended June 30,
2010 and 2009, advertising expense totaled $94,000 and $125,000,
respectively.
Gain
on Extinguishment of Liability
The
Company realized $50,000 of income from a settlement with a creditor for the
year ended June 30, 2010, which is included in Other Income.
The
Company realized $134,000 of income from the extinguishment of liabilities for
the year ended June 30, 2009 due to the expiration of the statute of limitations
related to such liabilities, which is included in Other
Income.
Foreign Currency
Management
has determined that the functional currency of its subsidiaries is the local
currency. Assets and liabilities of the UK subsidiaries are translated into US
dollars at the year-end exchange rates. Income and expenses are translated at an
average exchange rate for the year and the resulting translation loss
adjustments are accumulated as a separate component of stockholders’
equity. The translation loss adjustment totaled $286,000 and$2,283,000
for the years ended June 30, 2010 and 2009, respectively.
Foreign
currency gains and losses from transactions denominated in other than respective
local currencies are included in income. The Company had no foreign currency
transaction gains (losses) for all periods presented.
F-15
Comprehensive
Loss
Comprehensive
loss includes all changes in equity (net assets) during a period from non-owner
sources. For the year ended June 30, 2010, the components of comprehensive loss
consist of foreign currency translation losses. For the year ended June 30,
2009, the components of comprehensive loss consists of foreign currency
translation loss and unrealized gain on investments in available – for – sale
securities.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the enactment occurs.
Deferred taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The
Company’s practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had no accrual for interest or
penalties on the Company’s consolidated balance sheets at June 30, 2010 and
2009, and has not recognized interest and/or penalties in the consolidated
statements of operations for the years ended June 30, 2010 and
2009.
Basic
and Diluted Loss Per Share
Basic
loss per common share is computed based on the weighted average number of shares
outstanding for the year. Diluted loss per share is computed by dividing net
loss by the weighted average shares outstanding assuming all potential dilutive
common shares were issued. During periods in which the Company incurs losses,
common stock equivalents, if any, are not considered, as their effect would be
anti-dilutive. For the years ended June 30, 2010 and June 30, 2009, there were
no dilutive shares. For the year ended June 30, 2010, a total of 22,498,135
common stock purchase warrants and debt convertible into 2,698,005 shares were
excluded from the computation of diluted loss per share, as their effect would
have been anti-dilutive. For the year ended June 30, 2009, a total of
21,798,135 common stock purchase warrants and debt convertible into 3,386,616
shares
were excluded from the computation of diluted loss per share, as their effect
would have been anti-dilutive. If the Company had reported net income for the
years ended June 20,2010 and 2009, only the convertible debt would have been
dilutive.
F-16
The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per share computation for the years ended June 30:
2010
|
2009
|
|||||||
Numerator
for basic and diluted loss per share:
|
||||||||
Net
loss
|
$ | (627,000 | ) | $ | (7,623,000 | ) | ||
Deemed
distribution to parent company
|
- | (169,000 | ) | |||||
Net
loss available to common shareholders
|
$ | (627,000 | ) | $ | (7,792,000 | ) | ||
Denominator
for basic and diluted loss per common share:
|
||||||||
Weighted
average number of shares of common stock outstanding
|
83,970,278 | 86,272,712 | ||||||
Net
loss per common share available to common stockholders - basic and
diluted
|
$ | (0.01 | ) | $ | (0.09 | ) |
Recent
Accounting Pronouncements
In
September 2009, the accounting standard regarding multiple deliverable
arrangements was updated to require the use of the relative selling price method
when allocating revenue in these types of arrangements. This method allows
a vendor to use its best estimate of selling price if neither vendor specific
objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update will be
adopted by the Company effective July 1, 2010, and may be adopted prospectively
for revenue arrangements entered into or materially modified after the date of
adoption or retrospectively for all revenue arrangements for all periods
presented. The Company is currently evaluating the impact this standard update
will have on its consolidated financial statements.
In
September 2009, the accounting standard regarding arrangements that include
software elements was updated to require tangible products that contain software
and non-software elements that work together to deliver the products essential
functionality to be evaluated under the accounting standard regarding multiple
deliverable arrangements. This standard update will be adopted by the Company
effective July 1, 2010, and may be adopted prospectively for revenue
arrangements entered into or materially modified after the date of adoption or
retrospectively for all revenue arrangements for all periods presented. The
Company is currently evaluating the impact this standard update will have on its
consolidated financial statements.
F-17
Effective
July 1, 2009, the Company adopted the accounting standard that provides
guidance for determining whether an equity-linked financial instrument, or
embedded feature, is indexed to an entity’s own stock. The standard
applies to any freestanding financial instruments or embedded features that have
the characteristics of a derivative, and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of the adoption, 5,083,333 of the Company’s issued and outstanding common
stock purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment. These warrants
have an average exercise price of $0.21 and expiration dates of December 31,
2013. In addition, amounts related to the embedded conversion feature of
convertible notes issued previously treated as equity pursuant to the derivative
treatment exemption were also no longer afforded equity treatment. As such,
effective July 1, 2009, the Company reclassified the fair value of these common
stock purchase warrants and recorded the fair value of the embedded conversion
features, which both have exercise price reset features, from equity to
liability status as if these warrants and embedded conversion features were
treated as a derivative liability since the earliest date of issue in December
2007. On July 1, 2009, the Company reclassified from additional paid-in
capital, as a cumulative effect adjustment, approximately $868,000 to derivative
liabilities, increased the debt discount and derivative liabilities by a gross
amount of approximately $310,000, decreased accumulated deficit by approximately
$619,000 for the change in fair value of derivative liabilities for the period
from December 2007 through June 30, 2009 and increased accumulated deficit by
approximately $158,000 for additional amortization of debt discount for the
period from December 2007 through June 30, 2009. The fair value of the common
stock purchase warrants was approximately $291,000 and the embedded conversion
feature was approximately $0 on June 30, 2010. The total value of
these derivative liabilities declined from $558,000 to $291,000 for the year
ended June 30, 2010. As such, the Company recognized approximately $267,000
gain from the change in fair value of the derivative liabilities for the year
ended June 30, 2010.
All
future changes in the fair value of these warrants and embedded conversion
features will be recognized in earnings until such time as the warrants are
exercised or expire and the debt is converted to common stock or repaid. These
common stock purchase warrants and conversion feature do not trade in an active
securities market, and as such, the Company estimates the fair value of these
warrants and conversion feature using the Black-Scholes option pricing model.
The assumptions used to estimate the fair value of the derivative liability at
June 20, 2010 and July 1, 2009 are as follows:
F-18
June 30,
|
July 1,
|
|||||||
2010
|
2009
|
|||||||
Annual
dividend yield
|
0.0 | % | 0.0 | % | ||||
Expected
life (years)
|
0.42 - 3.50 | 4.50 | ||||||
Risk-free
interest rate
|
0.39%-2.65 | % | 0.54%-2.51 | % | ||||
Expected
volatility
|
82% - 137 | % | 175 | % |
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for recent periods. The Company
believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants and conversion features. The Company currently has no reason to believe
future volatility over the expected remaining life of these warrants and
conversion feature is likely to differ materially from historical volatility.
The expected life is based on the remaining term of the warrants and conversion
features. The risk-free rate is based on the US Treasury rate that corresponds
to the expected term of the warrants and conversion feature.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows:
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Fair
value of warrants
|
$ | - | $ | - | $ | 291,000 | $ | 291,000 | ||||||||
Total
|
$ | - | $ | - | $ | 291,000 | $ | 291,000 |
The
following table details the approximate fair value measurements within the fair
value hierarchy of the Company’s derivative liabilities using Level 3
Inputs:
Balance
as of June 30, 2009
|
$
|
-
|
||
Cumulative
effect of adoption
|
558,000
|
|||
Change
in fair value
|
(267,000
|
)
|
||
Balance
as of June 30, 2010
|
$
|
291,000
|
The
Company has no assets that are measured at fair value on a recurring basis.
There were no assets or liabilities measured at fair value on a non-recurring
basis during the year ended June 30, 2010.
F-19
NOTE 2. TRANSACTIONS WITH FORMER PARENT
COMPANY
On
November 24, 2008 (the “Dividend Distribution Date”), ADNW distributed a
dividend of 71,250,000 shares of the Company’s common stock that ADNW owned at
such time in order to complete the spin-off of MAM’s businesses. The dividend
shares were distributed in the form of a pro rata dividend to the holders of
record as of November 17, 2008 (the “Record Date”) of ADNW’s common and
convertible preferred stock. Each holder of record of shares of ADNW common and
preferred stock as of the close of business on the Record Date was entitled to
receive 0.6864782 shares of the Company’s common stock for each share of common
stock of ADNW held at such time, and/or for each share of ADNW common stock that
such holder would own, assuming the convertible preferred stock owned on the
Record Date was converted in full. Prior to the spin-off, ADNW owned
approximately 77% of the Company’s issued and outstanding common stock.
Subsequent to and as a result of the spin-off, the Company is no longer a
subsidiary of ADNW.
ADNW
attempted to settle an old outstanding obligation of ADNW of $775,000 with Mr.
Blumenthal (see Note 8) for 4,400,000 shares of ADNW common stock. The value of
the shares declined and Mr. Blumenthal elected not to accept the ADNW shares as
full compensation, and later demanded that the Company settle ADNW’s liability
with additional or different consideration. In April 2008, the Company accepted
the 4,400,000 shares from ADNW valued at $484,000 in exchange for attempting to
settle ADNW’s liability. The difference between the value of the ADNW shares and
the amount of ADNW’s initial obligation of $291,000 was recorded as general and
administrative expense in the consolidated statement of operations during such
period.
In
February 2010, Mr. Blumenthal commenced a civil action against the Company and
in April 2010, a settlement agreement was entered into (see Note
8).
During
the year ended June 30, 2009, the Company liquidated 5,231,622 common shares of
ADNW for net proceeds of $842,000, and issued 2,000,000 common shares of ADNW in
settlement of ADNW obligations (see Note 9). As a result of the Company’s
ownership of certain ADNW securities, the Company received approximately
13,965,295 shares of its own common stock in connection with the spin-off
dividend distribution. On December 31, 2008, the Company retired
13,722,112 of such shares. The remaining 243,183 shares were used by the Company
for rounding of fractional shares issued in respect of the spin-off dividend, to
make adjustments for the benefit of the holders of ADNW’s Series B Convertible
Preferred Stock which received fewer shares in connection with the spin-off than
the number to which they were entitled as a result of a calculation error
relating to the Series B conversion rate, and for other minor
adjustments.
As a
result of the above transactions, the Company no longer owns any shares of ADNW
stock and is no longer owed any monies from ADNW as of June 30,
2009.
F-20
NOTE
3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
The
Company received a total of 4,433,284 shares of First London PLC (formerly First
London Securities), from the sale of EXP Dealer Software Limited (“EXP”). The
shares had been listed for trading on the London Plus Exchange but effective
September 30, 2009, the shares were delisted.
The
Company wrote down its investment and recognized a loss of $4,723,000 because of
an other-than-temporary impairment as of June 30, 2009. The recognition of this
impairment loss in the statement of operations resulted in the reversal in other
comprehensive loss of a previously unrealized loss of $184,000 for
the year ended June 30, 2009. At June 30, 2010, the Company still holds all
the shares received.
Factors
considered in determining whether impairments are other-than-temporary include
(i) the length of time and extent to which fair value has been less than
the amortized cost basis, (ii) the financial condition and near-term
prospects of the investee and (iii) the Company’s intent and ability to
hold an investment for a period of time sufficient to allow for any anticipated
recovery in market value.
Investment
in available-for-sale securities under Level 3 classification as
of March 31, 2009
|
$
|
-
|
||
Transfers
into Level 3
|
1,238,000
|
|||
Write
down of available – for- sale securities
|
(1,238,000
|
)
|
||
Balance
as of June 30, 2009
|
-
|
Because
trading in the shares of First London PLC has been halted, the Company
determined that it no longer could value the securities using Level 2, but
required a Level 3 classification. Fair value measurements using
Level 3 inputs in the table above relate to the Company’s investments in
available-for-sale securities, which are based on the Company’s inability to
obtain current financial statements and the fact that trading in the shares
of First London PLC has been halted.
F-21
NOTE
4. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
June 30, 2010
|
June 30, 2009
|
|||||||
Leasehold
improvements
|
$ | 745,000 | $ | 774,000 | ||||
Computer
and office equipment
|
370,000 | 336,000 | ||||||
Equipment
under capital leases
|
10,000 | 10,000 | ||||||
Furniture
and equipment
|
258,000 | 275,000 | ||||||
1,383,000 | 1,395,000 | |||||||
Less:
Accumulated depreciation and amortization
|
(527,000 | ) | (367,000 | ) | ||||
$ | 856,000 | $ | 1,028,000 |
Depreciation
and amortization expense on property and equipment for the years ended June 30,
2010 and 2009 was $203,000 and $180,000, respectively.
NOTE
5. INTANGIBLE ASSETS
Intangible
assets consist of the following:
June 30,
2010
|
June 30,
2009
|
|||||||
Assets
not subject to amortization:
|
||||||||
Goodwill
|
$ | 8,924,000 | $ | 9,548,000 | ||||
Assets
subject to amortization:
|
||||||||
Completed
software technology (9-10 years useful life)
|
$ | 2,991,000 | $ | 3,109,000 | ||||
Customer
contracts / relationships (10 years useful life)
|
3,711,000 | 3,770,000 | ||||||
Automotive
data services (20 years useful life)
|
295,000 | 323,000 | ||||||
6,997,000 | 7,202,000 | |||||||
Less
: Accumulated amortization
|
(4,240,000 | ) | (3,636,000 | ) | ||||
Amortizable
intangible assets, net
|
$ | 2,757,000 | $ | 3,566,000 | ||||
Software
development costs
|
$ | 2,953,000 | $ | 3,083,000 | ||||
Less
: Accumulated amortization
|
(1,433,000 | ) | (1,392,000 | ) | ||||
Software
development costs, net
|
$ | 1,520,000 | $ | 1,691,000 |
For the
years ended June 30, 2010 and 2009, the Company recognized amortization expense
on its software development costs and other amortizable intangible assets of
$913,000 and $902,000, respectively.
F-22
Estimated
future amortization of software development costs and intangibles is as
follows:
Years
Ending June 30,
|
||||
2011
|
$
|
865,000
|
||
2012
|
865,000
|
|||
2013
|
690,000
|
|||
2014
|
588,000
|
|||
2015
|
472,000
|
|||
Thereafter
|
797,000
|
|||
Total
|
$
|
4,277,000
|
NOTE
6. LONG-TERM DEBT
Long-term
debt consists of the following as of June 30:
2010
|
2009
|
|||||||
ComVest
term loan, net of debt discount of $71,000 and
$303,000
|
$ | 3,912,000 | $ | 4,697,000 | ||||
ComVest
revolver
|
1,000,000 | 1,000,000 | ||||||
Secured
notes
|
243,000 | 388,000 | ||||||
McKenna
note
|
- | 150,000 | ||||||
Homann
note
|
- | 63,000 | ||||||
Other
notes
|
13,000 | 13,000 | ||||||
5,168,000 | 6,311,000 | |||||||
Less
current portion
|
(5,000,000 | ) | (1,598,000 | ) | ||||
Long
term portion
|
$ | 168,000 | $ | 4,713,000 |
Future
maturities of long-term debt (excluding debt discount) at June 30, 2010 are as
follows:
Years
Ending June 30,
|
||||
2011
|
$
|
5,071,000
|
||
2012
|
75,000
|
|||
2013
|
75,000
|
|||
2014
|
18,000
|
|||
Total
|
$
|
5,239,000
|
F-23
ComVest
Loan Agreement
On
December 21, 2007, the Company entered into a Revolving Credit and Term Loan
Agreement (the “Loan Agreement”) with ComVest Capital LLC (“ComVest”), as
lender, pursuant to which ComVest agreed to extend a $1,000,000 secured
revolving Credit Facility and a $5,000,000 Term Loan. The Loan Agreement
contains customary affirmative and negative covenants, including maximum limits
for capital expenditures per fiscal year, and ratios for liquidity. In
connection with obtaining a waiver for a violation of loan covenants at March
31, 2008, the Company reduced the exercise price from $0.3125 per share to $0.11
per share for one million warrants held by ComVest (see below), recognizing the
incremental fair value of the modified warrants of $24,000 as additional
interest expense.
As of
June 30, 2008, in connection with obtaining a waiver for a violation of loan
covenants, the Company and ComVest amended the Loan Agreement and modified
certain covenants. The cash flow ratio coverage was reduced and the lender
agreed to extend from January 1, 2009 until January 1, 2010 the start of the
loan amortization. As part of the amendment, ComVest required the Company to
reduce the exercise price from $0.39 to $0.11 for 2,000,000 warrants held by
ComVest (see below). The incremental fair value of the modified warrants was
$15,000, which was recorded as an additional debt discount and is being
amortized over the remaining life of the term loan.
As of
December 31, 2008, in connection with obtaining a waiver for violation of
certain loan covenants, the Company and ComVest agreed to increase the interest
on the $1,000,000 Credit Facility (described below) from 9.5% to 11%. The
amendment did not meet the requirements of a modification or exchange of debt
instruments, therefore no adjustment to the consolidated financial statements
was required.
Pursuant
to a waiver and amendment, the annual interest rate was restored to 9.5% as the
Company became compliant with the covenant as of the close of the quarter ended
on March 31, 2009.
As of
March 31, 2010, the Company did not meet the required ratio of (a) Earnings
Before Interest, Depreciation, and Amortization, minus capital expenditures
incurred to (b) debt service (all interest and principal payments) (“Debt
Service”) (the “EBIDA Ratio”) of 1.25:1as required by the amended Loan
Agreement. The Company’s failure to maintain this ratio constitutes an
event of default under the terms of the Loan Agreement. Under the terms of the
Loan Agreement, if any event of default occurs, the full principal amount of the
Note, together with interest and other amounts owing in respect thereof, to the
date of acceleration shall become, at ComVest’s election, immediately due and
payable in cash. On June 2, 2010, the Company paid ComVest a
Forbearance Fee of $25,000 to waive the default until June 20, 2010 and on June
17, 2010 ComVest raised the interest rate from 9.5% to 13.5%, for the Revolving
Credit Note and from 11% to 16% for the Term Note.
F-24
As of
June 30, 2010, the Company did not meet the EBIDA Ratio Covenant of
1.25:1 as required by the amended Loan Agreement. The Company’s failure to
maintain this ratio constitutes an event of default under the terms of the
Loan Agreement. The Company is in negotiations to resolve the default with
ComVest.
The
current interest rate is 13.5% on the Revolving Credit Facility and 16% on the
Term Note.
Credit Facility and Revolving Credit
Note. Pursuant to the terms of the Loan Agreement, the Credit Facility
became available on December 21, 2007 (the “Closing Date”), and the initial
maturity date was November 30, 2009. The Company had the option of
extending the maturity date of the Credit Facility for one additional year,
through November 30, 2010 upon written notice to ComVest provided that no
default or event of default have occurred and are continuing at that time, and
provided that the maturity date of the Credit Facility has not been accelerated
due to prepayment in full of the Term Loan. On September 9,
2009, the Company notified ComVest of its election to extend the
maturity date of the Credit Facility to November 30, 2010.
The
Credit Facility provides for borrowing capacity of an amount up to (at any time
outstanding) the lesser of the borrowing base at the time of each advance under
the Credit Facility, or $1,000,000. The borrowing base at any time is an amount
determined in accordance with a borrowing base report the Company is required to
provide to ComVest, based upon the Company’s Eligible Accounts and Eligible
Inventory, as such terms are defined in the Loan Agreement.
In
connection with the Credit Facility, the Company issued a Revolving Credit Note
(the “Credit Note”) payable to ComVest in the principal amount of $1,000,000,
bearing interest at a rate per annum equal to the greater of (a) the prime rate,
as announced by Citibank, N.A. from time to time, plus two percent (2%), or (b)
nine and one-half percent (9.5%). The interest rate, which had been 9.5% from
the Closing Date through December 31, 2008, was increased from 9.5% to 11% in
connection with obtaining a waiver from ComVest for violation of certain loan
covenants as described above. As of April 1, 2009, the
Company had regained compliance with the loan covenants and the interest rate
was reduced from 11% back to 9.5%. The applicable interest rate will be
increased by four hundred (400) basis points during the continuance of any event
of default under the Loan Agreement. Interest is computed on the daily unpaid
principal balance and is payable monthly in arrears on the first day of each
calendar month commencing January 1, 2008. Interest is also payable upon
maturity or acceleration of the Credit Note.
F-25
The
Company has the right to prepay all or a portion of the principal balance on the
Credit Note at any time, upon written notice, with no penalty. The Credit Note
is secured by subsequently all of the assets of the Company pursuant to the
provisions of certain Security Documents.
The
Company also has the option to terminate the Credit Facility at any time upon
five business days’ prior written notice, and upon payment to ComVest of all
outstanding principal and accrued interest of the advances on the Credit
Facility, and prorated accrued commitment fees. The Credit Facility commitment
also terminates, and all obligations become immediately due and payable, upon
the consummation of a Sale, which is defined in the Loan Agreement as certain
changes of control or sale or transfers of a material portion of the Company’s
assets.
At June
30, 2010, the Company had drawn down the $1,000,000 Credit Facility in
full. The interest rate as of June 30, 2010 was13.5%.
Term Loan and Convertible Term
Note. Pursuant to the
terms of the Loan Agreement, ComVest extended to the Company a term loan in the
principal amount of $5,000,000, on the Closing Date. The term loan is a one-time
loan, and unlike the Credit Facility, the principal amount is not available for
re-borrowing.
The term
loan is evidenced by a Convertible Term Note (the “Term Note”) issued by the
Company on the Closing Date, and payable to ComVest in the principal amount of
$5,000,000. The Term Note bears interest at a rate of eleven percent (11%) per
annum, except that during the continuance of any event of default, the interest
rate will be increased to sixteen percent (16%).
As
amended (see “ComVest Loan Agreement” above), the Term Note is repayable in 10
equal monthly installments of approximately $208,333, payable on first day of
each calendar month commencing February 1, 2010 through November 1,
2010, with the balance of $2,708,333 due on November 30, 2010.
The
Company has the option to prepay the principal balance of the Term Note in whole
or in part, at any time, upon 15 days’ prior written notice. The Company will be
required to prepay the Term Loan in whole or part under certain circumstances.
In the event that the Company prepays all or a portion of the Term Loan, the
Company will ordinarily pay a prepayment premium in an amount equal to (i) three
percent (3%) of the principal amount being prepaid if such prepayment is made or
is required to be made on or prior to the second anniversary of the Closing
Date, and
(ii) one percent (1%) of the principal
amount being prepaid if such prepayment is made or is required to be made
subsequent to the second anniversary of the Closing Date.
F-26
The
principal and interest payable on the Term Note is convertible into shares of
the Company’s common stock at the option of ComVest. In addition, the
Company may require conversion of the principal and interest under certain
circumstances. The initial conversion price was $1.50 per
share. The number of shares issuable upon conversion of the
Term Note (the “Conversion Shares”), and/or the conversion price, may be
proportionately adjusted in the event of any stock dividend, distribution, stock
split, stock combination, stock consolidation, recapitalization or
reclassification or similar transaction. In addition, the number of Conversion
Shares, and/or the conversion price may be adjusted in the event of certain
sales or issuances of shares of the Company’s common stock, or securities
entitling any person to acquire shares of common stock, at any time while the
Term Note is outstanding, at an effective price per share which is less than the
then-effective conversion price of the Term Note (see Note
1).
On July
3, 2008, the conversion price for the Term Note was reduced from $1.50 to $1.49
as a result of certain anti-dilution protection contained therein following the
issuance by the Company of additional shares of common stock and warrants to
purchase common stock. Consequently, the number of shares issuable upon
conversion of the principal amount of the Term Note was increased to 3,361,345
shares from 3,333,333 shares, which was accounted for in the change in fair
value of derivative liabilities.
The
Company incurred a closing fee of $100,000 in connection with the Term Loan. In
connection with the Credit Facility, the Company has agreed to pay an annual
commitment fee of $15,000, on December 1 of each year, commencing December 1,
2008, and on any termination date (pro-rated, if applicable), that the Credit
Facility is in effect, as well as a collateral monitoring and administrative fee
of $1,500 per month.
The
expenses of the Loan Agreement were approximately $641,000, which included a
finder’s fee of $300,000, lender fees of $190,000 and professional and due
diligence fees of approximately $151,000. The net proceeds to the Company were
approximately $4,359,000. The fees were allocated between debt issuance costs
and debt discount. The debt issuance costs of $478,000 were recorded on the date
of entering into the agreement in other assets in the accompanying consolidated
balance sheets and are being amortized and charged to interest expense over the
term of the loan using the effective interest method. The balance of the debt
issuance costs was approximately $7,000 as of June 30, 2010 and is included in
Other assets in the accompanying consolidated balance
sheet. Amortization of the issuance costs was approximately $129,000
for the year ended June 30,
2010, and $246,000 for the year ended June
30, 2009, respectively. A debt discount of
$163,000 was recorded in the consolidated balance sheet on the date of entering
into the agreement as a reduction in the carrying value of the debt, and is
being amortized and charged to interest expense over the term of the loan using
the effective interest method. The Company also issued warrants to ComVest to
purchase shares of the Company’s Common Stock (see below). The relative fair
value of these warrants was approximately $868,000 and recorded in the debt
discount. Additionally, due to the adoption of the accounting standard that
provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock, effective July 1,
2009, the Company recorded an additional $310,000 of debt discount as if
incurred on the date of the agreement (see Note 2). The balance of
the debt discount is approximately $71,000 as of June 30, 2010.
F-27
Warrants. In connection with
the Loan Agreement, the Company issued warrants to ComVest to purchase the
following amounts of shares of the Company’s Common Stock, exercisable after the
Closing Date and expiring December 31, 2013: a) Warrant to purchase 1,000,000
shares of common stock at an exercise price of $0.3125 per share; b) Warrant to
purchase 2,000,000 shares of common stock at an exercise price of $0.39 per
share subsequently repriced to $0.11 per share; and c) Warrant to purchase
2,083,333 shares of common stock at an exercise price of $0.3625 per share
subsequently repriced to $0.3595 per share; (each, a “Warrant”) (the 5,083,333
shares collectively issuable upon exercise of the Warrants are referred to
herein as the “Warrant Shares”). The relative fair value of the Warrants at the
time of the issuance was $868,000 using a Black Scholes valuation
model and also contains a cashless exercise feature. The warrant valuation was
computed using a 3.5% risk-free interest rate, a 99% volatility and a six-year
life. The value of the Warrants is included in debt discount, is recorded in the
consolidated balance sheet as a reduction in the carrying value of the debt, and
is being amortized and charged to interest expense over the term of the loan
using the effective interest method.
The
number of shares issuable upon exercise of the Warrants, and/or the applicable
exercise prices, may be proportionately adjusted in the event of any stock
dividend, distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar transaction. In addition, the
number of shares issuable upon exercise of the Warrants, and/or the applicable
exercise prices may be adjusted in the event of certain issuances of shares of
the Company’s common stock, or securities entitling any person to acquire shares
of common stock, at any time while the Warrants are outstanding, at an effective
price per share which is less than the then-effective exercise prices of the
Warrants.
The
Company has also granted certain registration rights and piggyback registration
rights to the holder(s) of the securities underlying the Term Note and Warrants.
The registration for the sale of the securities underlying the Term Note and
Warrants was declared effective by the Securities and Exchange Commission on May
1, 2009.
F-28
The
Company issued additional warrants to purchase 250,000 shares of common stock as
compensation for assistance in securing the $5,000,000 Term Loan. The warrants
were valued at $42,000 using a Black Sholes valuation model and are included in
debt issuance cost. The warrant valuation was computed using a 3.5% risk free
interest rate, a 99% volatility and a six-year life.
Amortization
of debt discount was $384,000 and amortization of debt issuance costs was
$130,000 for the year ended June 30, 2010. Amortization of debt discount was
$453,000 and amortization of debt issuance costs was $246,000 for the year ended
June 30, 2009. The unamortized balance of the debt discount related to the
warrants was $54,000 and $257,000 as of June 30, 2010 and 2009,
respectively. The unamortized balance of the debt issuance cost was
$0 and $48,000 for June 30, 2010 and 2009, respectively. The unamortized balance
of the discount related to the conversion feature was $17,000 and $0 for June
30, 2010 and 2009, respectively.
Homann
Note
The
Company repaid the note payable to Homann Tire LTD (“Homann”) during the year
ended June 30, 2010. This note in the principal amount of
$125,000, with interest at 8% per annum, had an initial maturity date of April
29, 2009. The terms of the note included interest only payments of $833 per
month. A principal payment of $25,000 was made in April 2007. The remaining
balance of $125,000 was payable in April 2009. On April 3,
2009, the Company amended the payment terms and agreed to repay the note in six
monthly installments of $21,450 which included interest at 10%. The
amendment did not meet the requirements of a Modification or Exchange of Debt
Instruments, therefore no adjustment to the financial statements was required.
The final payment was made in September 2009.
McKenna
Note
The
Company had issued an unsecured note payable to Mr. A. McKenna in the original
amount of $825,000 with interest at 8% per annum The note was
initially due in July 2009, and was payable in 24 monthly installments of
$37,313 including interest. In February 2009, the Company orally advised Mr.
McKenna that it would reduce the monthly payment to $18,650 per month, but there
was no written amendment to the note between the Company and Mr.
McKenna. Since February 2009, the note holder accepted the reduced
monthly payments, and did not notify the Company of any violations of the terms
and conditions of the payment agreement. The Company repaid the note in
full during the year ended June 30, 2010.
F-29
Secured
Notes
The
Company has secured notes with unrelated parties totaling $243,000 payable over
12 to 48 months with monthly payments of $4,137 and quarterly payments of $6,278
which will mature through 2014. The notes bear interest rates of
5.49% to 9.54% and are secured by leasehold improvements and equipment with a
carrying value of $332,000.
NOTE
7. INCOME TAXES
The
Company is subject to taxation in the US, UK and various state jurisdictions.
The Company’s tax years for 1993 and forward are subject to examination by the
US and state tax authorities due to the carry forward of unutilized net
operating losses.
At June
30, 2010, the Company had net US deferred tax assets of $914,000. Due to
uncertainties surrounding the Company’s ability to generate future US taxable
income to realize these assets, a full valuation allowance has been established
to offset the net US deferred tax asset. Additionally, the future utilization of
the Company’s Federal and California net operating loss credit carry forwards
(“NOLs”) to offset future taxable income maybe subject to an annual limitation,
pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership
changes that may have occurred previously or that could occur in the future. The
Company has not formally analyzed any NOLs from the acquired subsidiaries to
determine the maximum potential future tax benefit that might be available, nor
has it performed a Section 382 analysis to determine the limitation of the NOLs.
During the year ended June 30, 2010, the Company estimated the amount of NOLs
that would be allowed had a Section 382 analysis been performed, which resulted
in an increase in the NOLs of $9.3 million and a corresponding increase in its
valuation allowance as future realizability is uncertain. The Company will
adjust its net operating losses to account for any material differences arising
between the estimated amount and the amount determined pursuant to the
study. When a formal analysis is finalized, the Company plans to
update its unrecognized tax benefits. Due to the existence of the valuation
allowance, future changes in the Company’s unrecognized tax benefits will not
impact the Company’s tax provision.
At June
30, 2010, the Company had Federal income tax NOLs of approximately $23.9 million
and a California income tax NOL of approximately $10.2 million since the date
ADNW acquired the subsidiaries. The Federal and California NOLs expire at
various dates through 2030 and 2020, respectively, unless previously utilized.
At June 30, 2010, the Company had UK income tax NOLs of approximately $1.0
million that can be carried forward indefinitely until
utilized.
F-30
The
change in the valuation allowance is primarily attributable to the removal of
the deferred tax assets related to the NOLs, offset by the change in the current
year net deferred tax assets.
The
provision for income taxes consists of the following for the years ended June
30, 2010 and 2009:
US
Federal
|
US
State
|
UK
Corporate
|
Total
|
|||||||||||||
2010
|
||||||||||||||||
Current
|
$ | - | $ | - | $ | 694,000 | 694,000 | |||||||||
Deferred
|
- | - | - | - | ||||||||||||
Total
|
$ | - | $ | - | $ | 694,000 | 694,000 | |||||||||
2009
|
||||||||||||||||
Current
|
$ | - | $ | - | $ | 386,000 | 386,000 | |||||||||
Deferred
|
- | - | - | - | ||||||||||||
Total
|
$ | - | $ | - | $ | 386,000 | 386,000 |
The tax
effects of temporary differences and carry-forwards that give rise to
significant portions of deferred tax assets consist of the following at June 30,
2010 and 2009:
June 30,
2010
|
June 30,
2009
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carry-forwards
|
$ | 8,378,000 | $ | 3,729,000 | ||||
Unrealized
loss on available-for-sale securities
|
1,889,000 | 1,889,000 | ||||||
Deferred
revenue
|
151,000 | 145,000 | ||||||
Reserves
and accruals
|
128,000 | 124,000 | ||||||
Deferred
rent
|
44,000 | - | ||||||
Derivative
liabilities
|
116,000 | - | ||||||
Total
deferred tax assets
|
10,706,000 | 5,887,000 | ||||||
Deferred
tax liabilities:
|
||||||||
Other
acquired amortizable intangibles
|
(1,103,000 | ) | (1,426,000 | ) | ||||
Software
development costs
|
(461,000 | ) | (482,000 | ) | ||||
Depreciation
and amortization
|
(86,000 | ) | (116,000 | ) | ||||
State
taxes
|
- | - | ) | |||||
Total
deferred tax liabilities
|
(1,650,000 | ) | (2,024,000 | ) | ||||
Valuation
allowance
|
(9,698,000 | ) | (4,743,000 | ) | ||||
Net
deferred tax liabilities
|
$ | (642,000 | ) | $ | (880,000 | ) |
F-31
The
provision (benefit) for income taxes for the years ended June 30, 2010 and 2009
differs from the amount computed by applying the US federal income tax rates to
net loss from continuing operations before taxes as a result of the
following:
June 30,
|
||||||||
2010
|
2009
|
|||||||
Taxes
at statutory rates applied to loss from continuing operations
before taxes
|
$ | 23,000 | $ | (2,460,000 | ) | |||
State
taxes, net of federal effect
|
1,000 | (462,000 | ) | |||||
Non-deductible
goodwill impairment
|
- | 340,000 | ||||||
Other
net
|
(20,000 | ) | 82,000 | |||||
Increase
in acquired net operating losses
|
(4,057,000 | ) | - | |||||
Differential
in UK corporate tax rate
|
(208,000 | ) | (103,000 | ) | ||||
Change
in valuation allowance
|
4,955,000 | 2,989,000 | ||||||
Total
adjustments
|
671,000 | 2,846,000 | ||||||
Provision
for income taxes
|
$ | 694,000 | 386,000 |
The
Company does not intend to repatriate any earnings from the UK subsidiaries to
the U.S.
NOTE
8. COMMITMENTS AND CONTINGENCIES
Legal
Matters
From time
to time, the Company is subject to various legal claims and proceedings arising
in the ordinary course of business. The ultimate disposition of these
proceedings could have a materially adverse effect on the consolidated financial
position or results of operations of the Company.
|
(1)
|
On
August 1, 2007, the Company and Mr. McKenna entered into an agreement that
settled all outstanding actions by Mr. McKenna against the Company and its
subsidiaries related to the initial action against CarParts Technologies,
Inc., which is now known as ASNA. Pursuant to the settlement, the Company
paid Mr. McKenna $2,000,000 in cash, issued him an 8% promissory note in
the principal amount of $825,000, which is payable over 24 months, and
issued Mr. McKenna 1,718,750 shares of the Company’s Common Stock, which
represented $825,000 at a value of $0.48 per share (the closing price of
the Company’s Common Stock on the date of settlement). Mr. McKenna was
also entitled to warrants to purchase an equivalent number of shares of
Common Stock at the same price. Upon entering this agreement all parties
agreed to withdraw all existing litigation and claims. The Company
finalized its agreement with McKenna on December 6, 2007 and revised its
litigation accrual to $3,650,000 to reflect the settlement. The shares
were issued in August 2007. In November 2007,
the Company amended the settlement agreement and
issued 1,718,750 warrants to purchase Common Stock for $0.48 per share.
The warrants were issued to replace the Common Stock included in the
settlement agreement. In February 2009, the Company orally advised Mr.
McKenna that it would reduce the monthly payment on the note to $18,650
per month from $37,313 per month. Such amendment was not memorialized in
writing, Since February 2009, Mr. McKenna accepted the reduced monthly
payments, and has not notified the Company of any violations of the terms
and conditions of the payment agreement. The Company repaid the note
in full during the three month period ended March 31, 2010 (see Note
9).
|
F-32
|
(2)
|
Additionally,
the Company entered into a settlement agreement with Mr. Arthur
Blumenthal, a former shareholder of Anderson BDG, Inc. Mr. Blumenthal’s
lawsuit against the Company’s parent ADNW emanated from an agreement Mr.
Blumenthal had with a subsidiary of the Company, ASNA (f/k/a CarParts
Technologies, Inc.) for the purchase of Anderson BDG, that had not been
settled although it was past due. The Company assumed the liability as
part of a plan of spinning off certain businesses into the Company and
renegotiated the agreement with Mr. Blumenthal, the terms of which
required the Company to make a payment of $50,000 cash and the issuance to
Mr. Blumenthal and registration of 300,000 shares of the Company’s common
stock, which were issued in fiscal 2007 and valued at $0.48 per share,
(the closing price of the Company’s common stock on the date of
settlement) or $144,000. The Company subsequently completely settled the
lawsuit with Mr. Blumenthal and repaid his notes in fiscal
2008.
|
On
February 17, 2010, Mr. Blumenthal commenced a civil action against the Company,
certain subsidiaries, and current and former officers and directors of the
Company. The Company has previously recorded a liability for
$817,000 and recorded an additional expense of $513,000 in the quarter ending
March 31, 2010. On April 16, 2010, the Company settled the litigation with Mr.
Blumenthal for $1,250,000. On April 19, 2010, the Company paid Mr. Blumenthal
$350,000 as partial payment of the settlement amount. The balance of
the settlement amount is payable through November 2012 in equal monthly payments
of $31,750, which includes interest at 7%. In the event the Company defaults in
payment, Mr. Blumenthal may elect to reinstitute the original litigation. Of the
remaining balance due Blumenthal of $851,000, $326,000 is included in the
“Current portion of settlement liability” and $525,000 is included “Settlement
liability,, net of current portion”.
F-33
Indemnities
and Guarantees
The
Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers’ contracts the Company indemnifies the customer
that the software provided does not violate any US patent. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance
sheet.
The
Company has agreed to indemnify ComVest and its directors, officers, employees,
attorneys and agents against, and to hold ComVest and such persons harmless
from, any and all losses, claims, damages and liabilities and related expenses,
including reasonable counsel fees and expenses, they may incur, arising out of,
related to, or as a result of, certain transactions or events in connection with
the Loan Agreement (See Note 6).
Operating
Leases
The
Company leases its facilities and certain equipment pursuant to month-to-month
and non-cancelable operating lease agreements that expire on various dates
through October 2028. Terms of the leases provide for monthly payments ranging
from $500 to $15,300. For the years ended June 30, 2010 and 2009, the Company
incurred rent expense totaling approximately $459,000 and $586,000,
respectively. Future annual minimum payments under non-cancelable operating
leases are as follows:
Years Ending
June 30,
|
||||
2011
|
$ | 459,000 | ||
2012
|
375,000 | |||
2013
|
349,000 | |||
2014
|
344,000 | |||
2015
|
326,000 | |||
Thereafter
|
2,535,000 | |||
$ | 4,388,000 |
F-34
Employment
Agreements
On July
13, 2010, the Compensation Committee of the Board of Directors (the
“Compensation Committee”) approved employment agreements, including a bonus
plan, with each of Michael Jamieson, the Company’s President and Chief Executive
Officer and Charles F. Trapp, the Company’s Executive Vice President and Chief
Financial Officer. Such employments agreements and bonus plans were
entered into as of July 1, 2010 (the “Effective Date”), the first day of our
2011 fiscal year.
Michael Jamieson Employment
Agreement
The
Employment Agreement with Mr. Jamieson (the “Jamieson Agreement”) is for an
initial term of three years from the Effective Date, and is automatically
renewable for successive one-year periods unless terminated by Mr. Jamieson or
the Company. Mr. Jamieson will receive an annual base salary of 150,000 GBP
(approximately US$225,000), payable in British Pounds Sterling.
Mr.
Jamieson is eligible for a performance-based annual cash incentive bonus
depending on the extent to which the applicable performance goal(s) of the
Company, which are to be established by our Compensation Committee or pursuant
to a formal bonus plan, are achieved, subject to any operating covenants in
place with respect to outstanding bank debt. The Compensation Committee
established an EBITDA-related target for the fiscal year ended June 30, 2011
with respect to Mr. Jamieson’s potential incentive bonus for fiscal
2011.
In
addition, Mr. Jamieson is entitled to participate in all of the Company’s
benefit plans and our equity-based compensation plans, which currently consists
of the Company’s LTIP. Pursuant to the Jamieson Agreement, Mr. Jamieson is to be
awarded 500,000 restricted common shares under the LTIP (the “Stock
Grant”). The shares will vest ratably over a three-year period, with
20% vesting on the first anniversary of the Stock Grant, 30% vesting on the
second anniversary of the Stock Grant, and 50% vesting on the third anniversary
of the Stock Grant.
The
Jamieson Agreement also entitles Mr. Jamieson to be granted options to purchase
2,109,375 shares of the Company’s common stock under the LTIP (the “Option
Grant”). These options will vest on the third anniversary of the grant date, at
a strike price of $0.08 per share, depending on the extent to which certain
performance targets have been met. The options expire ten years from the grant
date, if vested. If the Company’s results: (i) amount to less than
80% of the established target(s), none of the Option Grant will vest; (ii) are
equal to 80% of the established target(s), 25% of the Option Grant will vest;
(iii) are equal to 100% of the established target(s), 50% of the award will
vest; and (iv) are equal to or better than 120% of the established target(s),
100% of the Option Grant will vest. Results between these established parameters
will be interpolated. The Option Grant will vest immediately upon a
Change of Control.
F-35
The
Jamieson Agreement provides that in the event Mr. Jamieson’s employment is
terminated by the Company other than for Cause or Disability, or Mr. Jamieson
shall terminate his employment for Good Reason, he is entitled to, among other
things, a severance payment equal to his 12 months base salary. In addition,
under such circumstances, all of Mr. Jamieson’s stock appreciation rights and
restricted stock will immediately vest and all vested stock options and stock
appreciation rights shall be payable in shares of our common stock.
Charles F. Trapp Employment
Agreement
The
Employment Agreement with Mr. Trapp (the “Trapp Agreement”) is for an initial
term of three years from the Effective Date, and is automatically renewable for
successive one-year periods unless terminated by Mr. Trapp or the Company. Mr.
Trapp will receive an annual base salary of $195,000, payable in U.S. dollars.
Mr. Trapp is eligible for a performance-based annual cash incentive bonus
depending on the extent to which the applicable performance goal(s) of the
Company, which are to be established by the Compensation Committee or pursuant
to a formal bonus plan, are achieved, subject to any operating covenants in
place with respect to outstanding bank debt. The Compensation Committee
established an EBITDA-related target for the fiscal year ended June 30, 2011,
with respect to Mr. Trapp’s potential incentive bonus for fiscal
2011.
In
addition, Mr. Trapp is entitled to participate in all of our benefit plans and
equity-based compensation plans, which currently consists of the LTIP. Pursuant
to the Trapp Agreement, Mr. Trapp is to be awarded 200,000 restricted common
shares under the LTIP (the “Stock Grant”). The shares will vest
ratably over a three-year period, with 20% vesting on the first anniversary of
the Stock Grant, 30% vesting on the second anniversary of the Stock Grant, and
50% vesting on the third anniversary of the Stock Grant.
The Trapp
Agreement also entitles Mr. Trapp to be granted options to purchase 1,828,125
shares of the Company’s common stock under the LTIP (the “Option Grant”). These
options will vest on the third anniversary of the grant date, at a strike price
of $0.08 per share, depending on the extent to which certain performance targets
have been met. The options expire ten years from the grant date, if
vested. If the Company’s results: (i) amount to less than 80% of the
established target(s), none of the Option Grant will vest; (ii) are equal to 80%
of the established target(s), 25% of the Option Grant will vest; (iii) are equal
to 100% of the established target(s), 50% of the award will vest; and (iv) are
equal to or better than 120% of the established target(s), 100% of the Option
Grant will vest. Results between these established parameters will be
interpolated. The Option Grant will vest immediately upon a Change of
Control.
The Trapp
Agreement provides that in the event Mr. Trapp’s employment is terminated by the
Company other than for Cause or Disability, or Mr. Trapp shall terminate his
employment for Good Reason, he is entitled to, among other things, a severance
payment equal to his 12 months base salary. In addition, under such
circumstances, all of Mr.
Trapp’s stock appreciation rights and restricted stock will
immediately vest and all vested stock options and stock appreciation rights
shall be payable in shares of the Company’s common stock.
F-36
Transactions
with ADNW Common Stock.
During
the quarter ended September 30, 2008, the Company reached an agreement with
three creditors of ADNW, and issued them 2,000,000 shares of ADNW common stock
owned by the Company in satisfaction of certain obligations of ADNW totaling
$140,000. At the time of settlement, the ADNW shares were trading at less than
the carrying value of the shares held by the Company, and the Company incurred a
loss of $53,000 on the settlement, which is recorded as a reduction to
additional paid-in-capital.
On
November 24, 2008 (the “Dividend Distribution Date”), ADNW distributed the
dividend of the 71,250,000 shares of the Company’s common stock that ADNW owned
at such time in order to complete the spin-off of the Company’s businesses. The
dividend shares were distributed in the form of a pro rata dividend to the
holders of record as of November 17, 2008 (the “Record Date”) of ADNW’s common
and convertible preferred stock. Each holder of record of shares of ADNW common
and preferred stock as of the close of business on the Record Date was entitled
to receive 0.6864782 shares of the Company’s common stock for each share of
common stock of ADNW held at such time, and/or for each share of ADNW common
stock that such holder would own, assuming the convertible preferred stock owned
on the Record Date was converted in full. Prior to the spin-off, ADNW
owned approximately 77% of the Company’s issued and outstanding common stock.
Subsequent to and as a result of the spin-off, the Company is no longer a
subsidiary of ADNW.
As a
result of the Company’s ownership of certain ADNW securities, the Company
received approximately 13,965,295 shares of its own common stock in connection
with the spin-off dividend distribution. On December 31, 2008, the
Company retired 13,722,112 of the shares. The remaining 243,112 shares were used
by the Company for rounding of fractional shares issued in respect of the
spin-off dividend, to make adjustments for the benefit of the holders of ADNW’s
Series B Convertible Preferred Stock which received fewer shares in connection
with the spin-off than the number to which they were entitled as a result of a
calculation error relating to the Series B conversion rate, and for other minor
adjustments. The value of these shares of approximately $29,000 was
recorded as a distribution.
F-37
Stock
Awards and Grants.
During
the quarter ended September 30, 2008, the Company approved the issuance of
483,000 shares of common stock to the non-management members of the Board of
Directors under the Company’s 2007 LTIP. The shares will be issued
over a three year period. On October 6, 2008, the Company issued
47,890 shares of these awards, which were valued at $7,184. On
January 6, 2009, the Company issued 31,955 shares of these awards, which were
valued at $2,876. On April 6, 2009, the Company issued 34,639 shares of these
awards, which were valued at $1,386. On July 6, 2009, the Company issued 36,537
shares of these awards, which were valued at $4,349. On October 6, 2009, the
Company issued 38,621 shares of these awards, which were valued at $3,862. On
January 6, 2010, the Company issued 38,621 shares of these awards, which were
valued at $2,703. On April 6, 2010, the Company issued 38,621 shares of these
awards, which were valued at $2,897.
On
October 6, 2008, the Company issued 35,000 shares of common stock to a director,
which were valued at $8,750.
On May
13, 2009, the Company issued 1,615,370 shares of common stock to certain
directors and officers in lieu of deferred fees and salaries, which were valued
at the $56,538.
On June
30, 2009, the Company issued 171,875 shares of common stock to certain directors
and employees in lieu of salaries, which were valued at the
$17,188.
On June
30, 2009, the Company issued 2,000,000 shares of common stock to certain
employees in lieu of salaries, which were valued
at $200,000.
During
the quarter ended September 30, 2009, the Company approved the issuance of
1,156,818 shares of common stock to the non-management members of the Board of
Directors under the Company’s 2007 LTIP. The shares will be issued
over a three year period. On October 6, 2009, the Company issued
86,644 shares of these awards, which were valued at $8,664, based on the closing
market price of the Company’s common stock. On January 6, 2010, the
Company issued 78,144 shares of these awards, which were valued at $5,470, based
on the closing market price of the Company’s common stock. On April 6, 2010, the
Company issued 83,644 shares of these awards, which were valued at $6,273, based
on the closing market price of the Company’s common stock.
F-38
On
September 30, 2009, the Company issued 149,125 shares of common stock to certain
directors in lieu of fees, which were valued at the $14,912, based on the
closing market price of the Company’s common stock.
On
January 4, 2010, the Company issued 152,679 shares of common stock to
certain directors in lieu of cash compensation fees, which were valued at
approximately $11,000, based on the closing market price.
On April
6, 2010, the Company issued 186,407 shares of common stock to certain
directors in lieu of cash compensation fees, which were valued at approximately
$14,900, based on the closing market price.
On May
13, 2008, the Compensation Committee of the Board of Directors of the Company
approved restricted stock awards of an aggregate of 2,985,000 shares of its
common stock to certain employees, a corporate officer and three outside
directors in respect of services previously rendered. The shares vest as
follows: 34% of the shares vest immediately on the date of grant. The remaining
66% of the shares will vest in three equal installments on each of the first,
second and third anniversaries of the grant date. An aggregate of 994,500 shares
were fully vested and issued on the date of grant. The Company
did not receive any consideration for these grants and recorded an expense of
$99,450 based on the market price of the Company’s common stock on the date of
issuance On May 13, 2009, 514,500 additional shares vested and were
issued. The Company did not receive any consideration for the
issuance of these shares, recorded an expense of $18,008 based on the market
price on the date of issuance. On May 13, 2010, 511,500 additional shares
vested and were issued. The Company did not receive any consideration
for the issuance of these shares, and recorded an expense of $51,150 based on
the market price on the date of issuance.
On
December 31, 2009, the Company issued 700,000 warrants exercisable at $0.08 per
share in settlement of a contract. The estimated fair value of the
warrants was $36,000 using the Black-Scholes valuation model and also
contains a net share cashless exercise feature. The warrant valuation
was computed using a 2.65% risk-free interest rate, a 146.7% volatility and a
four-year life. The value of the warrants is included in general and
administrative expenses in the consolidated statement of operations and
comprehensive loss.
F-39
Warrants:
At June
30, 2010, the Company has the following warrants outstanding:
Issuance
of warrants in connection with the ComVest Loan Agreement (see Note
6):
|
||||
ComVest
|
5,083,333
|
|||
Other
|
250,000
|
|||
5,333,333
|
||||
Issuance
of warrants to a service provider (valued at $27,000)
|
155,549
|
|||
Issuance of
warrants in McKenna settlement
|
3,437,500
|
|||
Issuance of
warrants to investors in private placement
|
5,208,337
|
|||
Issuance
of warrants Commonwealth in settlement for services offered (see
above)
|
700,000
|
|||
Issuance
of warrants Commonwealth in private placement (see above)
|
1,000,000
|
|||
Issuance
of warrants to placement agent in private placement
|
260,417
|
|||
Issuance
of warrants to Lewis Global Funds
|
6,402,999
|
|||
Total
issued
|
22,498,135
|
NOTE
10. SUBSEQUENT EVENTS
On
July 6, 2010, the Company issued 214,844 shares of common stock to certain
directors in lieu of compensation, which were valued at approximately
$17,000.
On July
7, 2010, the Company issued 126,692 shares of common stock to certain directors,
which were valued at approximately $10,000.
On July
13, 2010, the Compensation Committee of the Board of Directors approved
employment agreements, including a bonus plan, with each of Michael Jamieson,
our President and Chief Executive Officer and Charles F. Trapp, our Executive
Vice President and Chief Financial Officer. Such employments
agreements and bonus plans were entered into as of July 1, 2010 (the “Effective
Date”), the first day of our 2011 fiscal year (see note 8).
On July
16, 2010, the Company issued 655,769 shares of common stock to certain officers
in lieu of compensation, which were valued at approximately
$52,000.
On July
20, 2010 the Company completed an exchange of 1,792,662 Series A Preferred
Shares for 11,652,301 warrants excisable at $1.00 and expiring July 2, 2013
through April 24, 2014. The Company recorded an expense of $143,400 in July
2010.
F-40
On
September 14, 2010, the Securities and Exchange Commission declared effective a
Form S-1 registration statement filed by the Company to register 51,516,111
shares of common stock pursuant to a Rights Offering. If all the
Rights are subscribed (assuming no exercise of the oversubscription privilege)
the gross proceeds to the Company will be approximately $3,300,000.
INDEX
TO EXHIBITS
Description of Exhibit
|
||
3(i)
|
Certificate
of Incorporation of MAM Software Group, Inc., as amended (incorporated by
reference to Exhibit 3(i) to the Company’s Registration Statement on Form
S-1/A filed on July 15, 2008).
|
|
3(ii)
|
By
laws (incorporated by reference to Exhibit 3(ii) to the Company’s
Registration Statement on Form SB-2 filed on February 16,
2007).
|
|
4.1
|
Form
of Certificate of Common Stock (incorporated by reference to Exhibit 4.1
to the Company’s Registration Statement on Form SB-2 filed on February 16,
2007).
|
|
10.1
|
Share
Sale Agreement relating to EXP Dealer Software Limited dated August 4,
2006 among Auto Data Network, Inc., MAM Software Group, Inc. and MAM
Software Dealer Software Limited (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on August 31,
2006).
|
|
10.2
|
Share
Sale Agreement relating to Dealer Software and Services Limited dated
February 1, 2007 between MAM Software Group, Inc. and Auto Data Network,
Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on February 7, 2007).
|
|
10.4
|
Form
of Common Stock Purchase Warrant (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed July 6,
2007).
|
|
10.5
|
Form
of Registration Rights Agreement (incorporated by reference to Exhibit
10.3 to the Company’s Current Report on Form 8-K filed July 6,
2007).
|
|
10.6
|
Settlement
and Release Agreement between ASNA and Aidan J. McKenna (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed August 6, 2007).
|
|
10.7
|
Share
Sale Agreement, dated November 12, 2007, between EU Web Services, Ltd., as
Purchaser, MAM Software Group, Inc., as Vendor, and EXP Dealer Software
Ltd. (incorporated by reference to Exhibit 99.1 of the Company’s Current
Report on Form 8-K filed November 16,
2007)
|
10.8
|
Revolving
Credit and Term Loan Agreement dated as of December 21, 2007, by and
between ComVest Capital LLC, as Lender, and MAM Software Group, Inc., as
Borrower (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K filed December 31, 2007).
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10.9
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Revolving
Credit Note dated December 21, 2007 in the principal amount of $1,000,000
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report
on Form 8-K filed December 31, 2007).
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10.10
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Convertible
Term Note, dated December 21, 2007 in the principal amount of $5,000,000
(incorporated by reference to Exhibit 10.3 of the Company’s Current Report
on Form 8-K filed December 31, 2007).
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Collateral
Agreement dated as of December 21, 2007 by and among MAM Software Group,
Inc., Aftersoft Network, N.A. Inc., MAM Software Ltd., MAM Software Group
(UK) Ltd., AFS Warehouse Distribution Management, Inc., AFS Tire
Management, Inc. and AFS Autoservice Inc., and ComVest Capital LLC
(incorporated by reference to Exhibit 10.4 of the Company’s Current Report
on Form 8-K filed December 31, 2007).
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10.12
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Guaranty
Agreement dated December 21, 2007 by Aftersoft Network, N.A. Inc., MAM
Software Ltd., MAM Software Group (UK) Ltd., AFS Warehouse Distribution
Management, Inc., AFS Tire Management, Inc. and AFS Autoservice Inc., in
favor of ComVest Capital LLC (incorporated by reference to Exhibit 10.5 of
the Company’s Current Report on Form 8-K filed December 31,
2007).
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10.13
|
Form
of Validity Guaranty (incorporated by reference to Exhibit 10.6 of the
Company’s Current Report on Form 8-K filed December 31,
2007).
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10.14
|
Warrant,
dated as of December 21, 2007, to Purchase 1,000,000 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.7 of the Company’s Current Report on Form 8-K filed December 31,
2007).
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10.15
|
Warrant,
dated as of December 21, 2007, to purchase 2,000,000 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.8 of the Company’s Current Report on Form 8-K filed December 31,
2007).
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10.16
|
Warrant,
dated as of December 21, 2007, to purchase 2,083,333 Shares of Common
Stock of MAM Software Group, Inc. (incorporated by reference to Exhibit
10.9 of the Company’s Current Report on Form 8-K filed December 31,
2007).
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10.17
|
Registration
Rights Agreement dated as of December 21, 2007 by MAM Software Group, Inc.
for the benefit of the holders (incorporated by reference to Exhibit 10.10
of the Company’s Current Report on Form 8-K filed December 31,
2007).
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10.18
|
2007
Long-Term Stock Incentive Plan (incorporated by reference to Exhibit D of
the Company’s revised Definitive Proxy Statement filed on May 19,
2008).
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10.19
|
Employment
Agreement dated as of December 1, 2008 between the Company and Ian Warwick
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 5, 2008).
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|
10.20
|
Employment
Agreement dated as of December 1, 2008 between the Company and Charles F.
Trapp (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed December 5, 2008).
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10.21
|
Employment
Agreement dated as of December 1, 2008 between the Company and Simon
Chadwick (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K filed December 5, 2008).
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10.22
|
May
15, 2008 Waiver and Amendment (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K filed March 27,
2009).
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10.23
|
September
23, 2008 Waiver and Amendment (incorporated herein by reference to Exhibit
10.2 of the Company’s Current Report on Form 8-K filed March 27,
2009).
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10.24
|
February
10, 2009 Waiver and Amendment (incorporated herein by reference to Exhibit
10.3 of the Company’s Current Report on Form 8-K filed March 27,
2009).
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April
22, 2009 Amendment (incorporated by reference to Exhibit 10.1 of the
Company’s current Report on Form 8-K filed April 23,
2009).
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||
10.26
|
Consulting
Agreement with Commonwealth Associates LP dated June 3, 2008 (incorporated
herein by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1/A filed on April 3, 2009).
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14
|
Code
of Ethics (incorporated by reference to Exhibit 14 to the Company’s Annual
report on Form 10-K/A for the fiscal year ended June 30, 2007 filed
October 15, 2007.)
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21
|
List
of subsidiaries (incorporated by reference to Exhibit 21 to the Company’s
Registration Statement on Form S-1/A filed on July 15,
2008).
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31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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