Attached files
file | filename |
---|---|
EX-32.1 - KEYW HOLDING CORP | v201754_ex32-1.htm |
EX-31.2 - KEYW HOLDING CORP | v201754_ex31-2.htm |
EX-31.1 - KEYW HOLDING CORP | v201754_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period
ended: September 30,
2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________________ to ________________
Commission
File Number: 001-34891
The KEYW Holding
Corporation
|
(Exact
name of registrant as specified in its
charter)
|
Maryland
|
27-1594952
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
1334
Ashton Road, Suite A
|
|
Hanover, Maryland
|
21076
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (443)
270-5300
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, and (2) has been subject to such filing requirements for
the past 90 days.
Yes ¨ No x
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 x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x (Do
not check if smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
The
number of shares outstanding of the issuer’s common stock ($0.001 par value), as
of the latest practicable date, October 31, 2010 is 25,239,140.
TABLE
OF CONTENTS
PART
I
|
FINANCIAL
INFORMATION
|
|
Item
1
|
Financial
Statements
|
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and December 31,
2009
|
2
|
|
Consolidated
Statements of Operations (unaudited) for the Three and Nine Months Ended
September 30, 2010 and September 30, 2009
|
3
|
|
Consolidated
Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended
September 30, 2010
|
4
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 2010 and September 30, 2009
|
5
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
24
|
Item
4
|
Controls
and Procedures
|
24
|
PART
II
|
OTHER
INFORMATION
|
|
Item
1
|
Legal
Proceedings
|
25
|
Item
1A
|
Risk
Factors
|
25
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
Item
6
|
Exhibits
|
26
|
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
Consolidated
Balance Sheets
(Dollars
shown in 000’s except share amounts)
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,259 | $ | 7,333 | ||||
Receivables,
net
|
21,844 | 9,409 | ||||||
Inventories
|
4,635 | 4,334 | ||||||
Prepaid
expenses
|
1,378 | 1,240 | ||||||
Income
tax receivable
|
223 | 223 | ||||||
Total
current assets
|
29,339 | 22,539 | ||||||
Property
and equipment, net
|
2,858 | 1,430 | ||||||
Goodwill
|
92,045 | 34,927 | ||||||
Other
intangibles, net
|
14,114 | 6,314 | ||||||
Deferred
tax asset
|
1,892 | 1,892 | ||||||
Other
assets
|
191 | 28 | ||||||
TOTAL
ASSETS
|
$ | 140,439 | $ | 67,130 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 4,539 | $ | 442 | ||||
Accrued
expenses
|
1,615 | 435 | ||||||
Accrued
salaries & wages
|
4,721 | 2,214 | ||||||
Revolver
|
10,500 | - | ||||||
Short-term
subordinated debt
|
11,001 | - | ||||||
Deferred
income taxes
|
83 | 83 | ||||||
Total
current liabilities
|
32,459 | 3,174 | ||||||
Long-term
liabilities:
|
||||||||
Long-term
subordinated debt
|
8,672 | - | ||||||
Non-current
deferred tax liability
|
8,613 | 1,564 | ||||||
Other
non-current liabilities
|
141 | 53 | ||||||
Accrued
earn-out
|
10,000 | - | ||||||
TOTAL
LIABILITIES
|
59,885 | 4,791 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.001 par value; 5,000,000 shares authorized, none
issued
|
- | - | ||||||
Common
stock, $0.001 par value;
100,000,000 shares authorized, 15,537,198 and
14,187,520 issued and outstanding
|
16 | 14 | ||||||
Additional
paid-in capital
|
74,969 | 66,504 | ||||||
Retained
earnings/(Accumulated deficit)
|
5,569 | (4,179 | ) | |||||
Total
stockholders' equity
|
80,554 | 62,339 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 140,439 | $ | 67,130 |
The accompanying notes to the
consolidated financial statements are an integral part of these consolidated
financial statements.
2
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Operations
(Dollars
shown in 000’s except share and per share amounts)
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Revenue
|
||||||||||||||||
Services
|
$ | 25,227 | $ | 8,212 | $ | 67,926 | $ | 22,468 | ||||||||
Products
|
3,765 | 1,846 | 10,725 | 4,474 | ||||||||||||
Total
|
28,992 | 10,058 | 78,651 | 26,942 | ||||||||||||
Cost
of Revenue
|
||||||||||||||||
Services
|
18,243 | 6,090 | 49,377 | 16,513 | ||||||||||||
Products
|
2,317 | 1,578 | 6,254 | 3,188 | ||||||||||||
Total
|
20,560 | 7,668 | 55,631 | 19,701 | ||||||||||||
Gross
Profit
|
||||||||||||||||
Services
|
6,984 | 2,122 | 18,549 | 5,955 | ||||||||||||
Products
|
1,448 | 268 | 4,471 | 1,286 | ||||||||||||
Total
|
8,432 | 2,390 | 23,020 | 7,241 | ||||||||||||
Operating
expenses
|
7,028 | 4,307 | 18,648 | 8,046 | ||||||||||||
Intangible
amortization expense
|
1,693 | 520 | 4,454 | 1,461 | ||||||||||||
Loss
from operations
|
(289 | ) | (2,437 | ) | (82 | ) | (2,266 | ) | ||||||||
Interest
Expense(income), net
|
1,005 | - | 1,677 | (100 | ) | |||||||||||
Other
non-operating (income)expense, net
|
(8,765 | ) | (76 | ) | (18,373 | ) | 872 | |||||||||
Total
non-operating (income)expense, net
|
(7,760 | ) | (76 | ) | (16,696 | ) | 772 | |||||||||
Income(Loss)
before provision for income taxes
|
7,471 | (2,361 | ) | 16,614 | (3,038 | ) | ||||||||||
Income
tax (expense)benefit
|
(3,063 | ) | 652 | (6,866 | ) | 546 | ||||||||||
Net
Income(Loss)
|
$ | 4,408 | $ | (1,709 | ) | $ | 9,748 | $ | (2,492 | ) | ||||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
15,531,332 | 13,940,176 | 15,174,140 | 13,023,080 | ||||||||||||
Fully
Diluted
|
18,443,699 | 13,940,176 | 18,176,841 | 13,023,080 | ||||||||||||
Basic
and diluted earnings per share
|
||||||||||||||||
Basic
|
$ | 0.28 | $ | (0.12 | ) | $ | 0.64 | $ | (0.19 | ) | ||||||
Fully
Diluted
|
$ | 0.24 | $ | (0.12 | ) | $ | 0.54 | $ | (0.19 | ) |
The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated financial statements.
3
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
Consolidated
Statement of Stockholders’ Equity (unaudited)
(Dollars
shown in 000’s except share amounts)
Common Stock
|
Retained
|
|||||||||||||||||||
Shares
|
Amount
|
APIC
|
Earnings
|
Total
|
||||||||||||||||
Balance
as of December 31, 2009
|
14,187,520 | $ | 14 | $ | 66,504 | $ | (4,179 | ) | $ | 62,339 | ||||||||||
Net
income
|
9,748 | 9,748 | ||||||||||||||||||
Warrant
exercise
|
1,022,728 | 1 | 4,499 | 4,500 | ||||||||||||||||
Option
exercise
|
250 | 0 | 1 | 1 | ||||||||||||||||
Restricted
stock forfeitures
|
(800 | ) | (0 | ) | (0 | ) | ||||||||||||||
Warrants
issued in conjunction with sub-debt
|
- | 585 | 585 | |||||||||||||||||
Stock
issued as part of the Insight acquisition
|
250,000 | 0 | 2,312 | 2,312 | ||||||||||||||||
Stock
based compensation
|
77,500 | 0 | 1,068 | 1,068 | ||||||||||||||||
Balance
as of September 30, 2010
|
15,537,198 | $ | 16 | $ | 74,969 | $ | 5,569 | $ | 80,554 |
The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated financial statements.
4
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Dollars
shown in 000’s except share amounts)
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Net income
|
$ | 9,748 | $ | (2,492 | ) | |||
Adjustments to
reconcile net loss to net
|
||||||||
Cash
used in operating activities
|
||||||||
Stock
compensation
|
1,068 | 127 | ||||||
Depreciation/Amortization
|
4,988 | 1,675 | ||||||
Warrant
accounting
|
- | 823 | ||||||
Loss
on disposal of equipment
|
10 | - | ||||||
Non-cash
interest expense
|
1,006 | - | ||||||
Non-cash
impact of TAG earn-out reduction
|
(17,750 | ) | - | |||||
Deferred
taxes
|
7,049 | 370 | ||||||
Decrease
(increase) in balance sheet items
|
||||||||
Receivables
|
(6,333 | ) | (3,186 | ) | ||||
Inventory
|
(301 | ) | (1,983 | ) | ||||
Prepaid
expenses
|
(542 | ) | (285 | ) | ||||
Accounts
payable
|
(1,284 | ) | 56 | |||||
Accrued
expenses
|
2,114 | 1,443 | ||||||
Other
balance sheet changes
|
(126 | ) | (866 | ) | ||||
Net
cash used in operations
|
(353 | ) | (4,318 | ) | ||||
Cash
flows from investing activities
|
||||||||
Acquisitions,
net of cash acquired
|
(27,629 | ) | (3,241 | ) | ||||
Purchase
of property and equipment
|
(1,470 | ) | (937 | ) | ||||
Proceeds
from the sale of equipment
|
128 | 4 | ||||||
Net
cash used in investing activities
|
(28,971 | ) | (4,174 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from stock issuances
|
- | 29,397 | ||||||
Proceeds
from revolver
|
18,100 | - | ||||||
Repayments
of revolver
|
(7,600 | ) | - | |||||
Proceeds
from subordinated debt
|
8,250 | - | ||||||
Proceeds
from warrant exercise
|
4,500 | - | ||||||
Net
cash provided by financing activities
|
23,250 | 29,397 | ||||||
Net
decrease in cash and cash equivalents
|
(6,074 | ) | 20,905 | |||||
Cash
and cash equivalents at beginning of period
|
7,333 | 5,397 | ||||||
Cash
and cash equivalents at end of period
|
$ | 1,259 | $ | 26,302 |
The
accompanying notes to the consolidated financial statements are an integral part
of these consolidated financial statements.
5
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
We
prepared our interim consolidated condensed financial statements that accompany
these notes in conformity with accounting principles generally accepted in the
United States of America for interim information and in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
The
interim financial information is unaudited, but reflects all normal adjustments
that are, in our opinion, necessary to provide a fair statement of results for
the interim periods presented. Certain information and note disclosures normally
included in the annual financial statements have been condensed or omitted
pursuant to those instructions. This interim information should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 2009, contained in our prospectus dated September 30, 2010 and
filed with the Securities and Exchange Commission on October 1, 2010 pursuant to
Rule 424(b)(4) under the Securities Act of 1933, as amended.
Corporate
Organization
The KEYW
Holding Corporation (“Holdco”) was incorporated in Maryland in December
2009. Holdco is a holding company and conducts its operations through
The KEYW Corporation (“Opco”) and its subsidiaries. Opco was
incorporated in Maryland in May 2008 and began operations on August 4,
2008. Opco became Holdco’s wholly-owned subsidiary on December 29,
2009 as part of a corporate reorganization (the
“Reorganization”). References to the “Company”, “KEYW”, “we”, “us”,
or “our” refer to Opco and its subsidiaries for any period prior to December 29,
2009 and to Holdco and its subsidiaries as of and after December 29,
2009.
Pursuant
to the Reorganization, all of the capital stock, options, and warrants of Opco
were exchanged for an equal number of shares of capital stock, options, and
warrants of Holdco, having substantially identical terms as the Opco
instruments, except that certain terms of the Opco warrants were modified in the
Reorganization when exchanged for replacement Holdco warrants so that the
warrants would no longer be classified as liability instruments under current
accounting guidance.
We
support the Intelligence Community’s (“IC”) transformation to Cyber Age mission
and operations by providing agile solutions that offer both flexibility and
scalability to the ICs’ most challenging and highly classified
problems. We provide a full range of engineering services as well as
fully integrated platforms that support the entire intelligence process,
including collection, analysis, processing and impact (synthesis of actionable
information). Our platforms include products that we manufacture, as
well as hardware and software that we integrate using the engineering services
of our highly skilled and cleared workforce.
We have
acquired seven businesses or operating entities since our inception including
S&H Enterprises of Central Maryland, Inc. (“S&H”) on September 2, 2008,
Integrated Computer Concepts, Incorporated (“ICCI”) and its wholly owned
subsidiary Coreservlets.com on September 30, 2008, the majority of assets from
Embedded Systems Design, Inc. on July 23, 2009, the government contracting
assets of Leading Edge Design & Systems, Inc. (“LEDS”) on October 29, 2009,
the assets of the Systems Engineering and Technical Assistance unit that
supports the National Reconnaissance Office from General Dynamics Advanced
Information Systems, Inc. on December 8, 2009, The Analysis Group, LLC (“TAG”)
on February 22, 2010, and Insight Information Technology, LLC (“IIT”) on March
15, 2010. See Note 2 for additional information on these
acquisitions.
Principles
of Consolidation
The
consolidated financial statements include the transactions of Holdco, Opco, and
its wholly owned subsidiaries, ICCI, S&H, TAG and IIT from the date of their
acquisition. All intercompany accounts and transactions have been
eliminated.
6
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Revenue
Recognition
We derive
the majority of our revenue from time-and-materials, firm-fixed-price,
cost-plus-fixed-fee, and cost-plus-award-fee contracts. Prior to our
acquisitions in late 2009, our revenue did not include any cost-plus type of
work. Revenues from cost reimbursable contracts are recorded as
reimbursable costs are incurred, including an estimated share of the applicable
contractual fees earned. For performance-based fees under cost reimbursable
contracts, we recognize the relevant portion of the expected fee to be awarded
by the client at the time such fee can be reasonably estimated, based on factors
such as prior award experience and communications with the client regarding
performance. For cost reimbursable contracts with performance-based fee
incentives, we recognize the relevant portion of the fee upon customer approval.
For time-and-materials contracts, revenue is recognized to the extent of
billable rates times hours delivered plus materials and other reimbursable costs
incurred. For fixed-price production contracts, revenue and cost are recognized
at a rate per unit as the units are delivered or by other methods to measure
services provided. This method of accounting requires estimating the total
revenues and total contract cost of the contract. During the performance of
contracts, these estimates are periodically reviewed and revisions are made as
required. The impact on revenue and contract profit as a result of these
revisions is included in the periods in which the revisions are made. This
method can result in the deferral of costs or the deferral of profit on these
contracts. Because we assume the risk of performing a fixed-price contract at a
set price, the failure to accurately estimate ultimate costs or to control costs
during performance of the work could result, and in some instances has resulted,
in reduced profits or losses on such contracts. Estimated losses on contracts at
completion are recognized when identified.
Contract
revenue recognition inherently involves estimation. Examples of estimates
include the contemplated level of effort to accomplish the tasks under the
contract, the cost of the effort, and an ongoing assessment of our progress
toward completing the contract. From time to time, as part of our management
processes, facts develop that require us to revise our estimated total costs or
revenue. To the extent that a revised estimate affects contract profit or
revenue previously recognized, we record the cumulative effect of the revision
in the period in which the facts requiring the revision become
known.
In
certain circumstances, and based on correspondence with the end customer,
management authorizes work to commence or to continue on a contract option,
addition or amendment prior to the signing of formal modifications or
amendments. We recognize revenue to the extent it is probable that the formal
modifications or amendments will be finalized in a timely manner and that it is
probable that the revenue recognized will be collected.
Cost
of Revenues
Cost of
revenues consists primarily of compensation expenses for program personnel, the
fringe benefits associated with this compensation and other direct expenses
incurred to complete programs, including cost of materials and subcontract
efforts.
Inventories
Our
inventory consists of work in process and finished goods. Inventories
are valued at the lower of cost (determined on a weighted average basis)
or market. Our inventory consists of specialty products that we
manufacture on a limited quantity basis for our customers. We
manufacture at quantity levels that are projected to be sold in the six month
period following production. The Company has not had any products
sold below their standard pricing less applicable volume discounts.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. Invoice terms range from net 10 days to net 30
days. Management provides for probable uncollectible amounts through
a charge to earnings and a credit to a valuation allowance (allowance for
doubtful accounts) based on its assessment of the current status of individual
accounts. Balances that are still outstanding after management has
used reasonable collection efforts are written-off through a charge to the
valuation allowance and a credit to accounts receivable. Currently
there is no valuation allowance as the Company believes all of its accounts
receivable are fully collectible.
Prepaid
Expenses
Prepaid
expenses generally consist of amounts paid in advance for rent, insurance and
advanced payments to suppliers for materials purchases.
7
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Property
and Equipment
All
property and equipment are stated at acquisition cost or in the case of
self-constructed assets, the cost of labor and a reasonable allocation of
overhead costs (no general and administrative costs are
included). The cost of maintenance and repairs, which do not
significantly improve or extend the life of the respective assets, are charged
to operations as incurred.
Provisions
for depreciation and amortization are computed on a straight-line method over
the estimated useful lives of between 3 and 7 years.
Long-Lived
Assets (Excluding Goodwill)
The
Company follows the provisions of FASB ASC topic 360-10-35, Impairment or Disposal of Long-Lived
Assets in accounting for long-lived assets such as property and equipment
and intangible assets subject to amortization. The guidance requires that
long-lived assets be reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An
impairment assessment is undertaken if the sum of the long-term undiscounted
cash flows is less than the carrying amount of the long-lived asset being
evaluated. Impairment losses are measured as the difference between the carrying
value of long-lived assets and their fair market value based on discounted cash
flows of the related assets. Impairment losses are treated as
permanent reductions in the carrying amount of the assets. The
Company has not recorded any impairments since inception.
Goodwill
Purchase
price in excess of the fair value of tangible and identifiable intangible assets
acquired and liabilities assumed in a business combination are recorded as
goodwill. In accordance with FASB ASC Topic 350-20, Goodwill, the Company tests
for impairment at least annually, using a two-step approach. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting unit’s
carrying amount, including goodwill, to the fair value of the reporting unit.
The Company operates as a single reporting unit. The fair value of the reporting
unit is estimated using a market capitalization approach. If the carrying amount
of the unit exceeds its fair value, goodwill is considered impaired and a second
step is performed to measure the amount of impairment loss, if any. The Company
performed the test during the fourth quarter of fiscal year 2009 and found no
impairment to the carrying value of goodwill. Management has
concluded that there have been no events subsequent to the impairment test that
would indicate an impairment of goodwill.
Intangibles
Intangible
assets consist of the value of customer related intangibles acquired in various
acquisitions. Intangible assets are amortized on a straight line basis over
their estimated useful lives unless the pattern of usage of the benefits
indicates an alternative method is more representative. The useful lives of the
intangibles range from one to seven years.
Concentrations
of Credit Risk
We
maintain cash balances that, at times, during the periods ended September 30,
2010 and December 31, 2009 exceeded the federally insured limit on a per
financial institution basis of $250. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk related to cash. In addition, we have credit risk
associated with our receivables that arise in the ordinary course of
business. In excess of 90% of our contracts are issued by the U.S.
Government and any disruption to cash payments from our end customer could put
the Company at risk.
Use
of Estimates
Management
uses estimates and assumptions in preparing these consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results
could vary from the estimates that were used.
8
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Cash
and Cash Equivalents
We
consider all highly liquid investments purchased with expected original
maturities of three months or less to be cash equivalents.
Fair
Value of Financial Instruments
The
balance sheet includes various financial instruments consisting of cash and cash
equivalents, accounts receivable, accounts payable, and debt instruments
including a line of credit and subordinated debt. The fair values of
these instruments approximate the carrying values due to the short maturity of
these instruments.
Research
and Development
Internally
funded research and development expenses are expensed as incurred and are
included in cost of operations in the accompanying consolidated statement of
operations. In accordance with FASB ASC Topic 730 — Research and Development,
such costs consist primarily of payroll, material, subcontractor and an
allocation of overhead costs related to product development. Research and
development costs totaled $167 and $84 for the three months ended September 30,
2010 and September 30, 2009, respectively. Research and development
costs totaled $408 and $647 for the nine months September 30, 2010 and September
30, 2009, respectively.
Income
Taxes
Income
taxes are accounted for under the asset and liability
method. 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 and operating loss and tax credit carry
forwards. 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 that includes the
enacted date. We will establish a valuation allowance if we determine
that it is more likely than not that a deferred tax asset will not be
realized.
For a tax
position that meets the more-likely-than-not recognition threshold, the Company
initially and subsequently measures the tax benefit as the largest amount that
it judges to have a greater than 50% likelihood of being realized upon ultimate
settlement with a taxing authority. The liability associated with
unrecognized tax benefits is adjusted periodically due to changing
circumstances, such as the progress of tax audits, case law developments and new
or emerging legislation. Such adjustments are recognized entirely in
the period in which they are identified. The effective tax rate includes the net
impact of changes in the liability for unrecognized tax benefits and subsequent
adjustments as considered appropriate by management. No such
adjustments were recorded as of September 30, 2010 or December 31,
2009.
Earnings
Per Share
Basic net
income per share is calculated by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income by the diluted weighted average
common shares, which reflects the potential dilution of stock options, warrants,
and contingently issuable shares that could share in our income if the
securities were exercised.
Outstanding
options and warrants of 6,184,181 at September 30, 2010 were included in the
computation of fully diluted net income per share. There were no
anti-dilutive common stock equivalents at September 30, 2010.
As of 9/30/10
|
Shares
|
Price Range
|
|||||
Warrants
|
4,813,806 |
$4.00
- $9.25
|
|||||
Options
|
1,370,375 |
$5.00
- $10.00
|
|||||
Total
|
6,184,181 |
Outstanding
options and warrants of 5,886,534 at September 30, 2009 were not included in the
computation of fully diluted net income per share because their effect would be
anti-dilutive as the Company was operating at a loss.
9
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
As of 9/30/09
|
Shares
|
Price Range
|
|||||
Warrants
|
5,621,534 |
$4.00
- $5.50
|
|||||
Options
|
265,000 |
$5.00
- $5.50
|
|||||
Total
|
5,886,534 |
Stock
Based Compensation
As
discussed in Note 10, the Company adopted a new stock option plan in December
2009 in conjunction with the Reorganization. The Company had
originally adopted a stock option plan in 2008. The Company applies
the fair value method that requires all share-based payments to employees and
non-employee directors, including grants of employee stock options, be expensed
over their requisite service period based on their fair value at the grant date,
using a prescribed option-pricing model. We use the Black-Scholes
option pricing model to value share-based payments. Compensation
expense related to share-based awards is recognized on an accelerated
basis. The expense recognized is based on the straight-line
amortization of each individually vesting piece of a grant. A grant
that vests equally over three years would expense all of the first year vesting
in the first twelve months, the second vesting would be expensed over twenty
four months and the third tranche would be expensed over thirty six
months. The calculated expense is required to be based upon awards
that ultimately vest and we have accordingly, reduced the expense by estimated
forfeitures.
The
following assumptions were used for option grants during the periods ended
September 30, 2010 and September 30, 2009.
Dividend
Yield — The Company has never declared or paid dividends on its common stock and
has no plans to do so in the foreseeable future.
Risk-Free
Interest Rate — Risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term approximating the expected life of the option term
assumed at the date of grant.
Expected
Volatility — Volatility is a measure of the amount by which a financial variable
such as a share price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The expected volatility is
based on the historical volatility of existing comparable public companies for a
period that approximates the estimated life of the options.
Expected
Term of the Options — This is the period of time that the options granted are
expected to remain unexercised. The Company estimates the expected life of the
option term based on the expected tenure of employees and historical
experience.
Forfeiture
Rate — The Company estimates the percentage of options granted that are expected
to be forfeited or canceled on an annual basis before stock options become fully
vested. The Company uses the forfeiture rate that is a blend of past turnover
data and a projection of expected results over the following twelve month period
based on projected levels of operations and headcount levels at various
classification levels with the Company.
Segment
Reporting
ASC
Section 280, Segment
Reporting, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information about
operating segments in interim financial reports. The guidance also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Management has concluded that the Company operates in one
segment based upon the information used by management in evaluating the
performance of its business and allocating resources and capital.
Recently
Issued Accounting Pronouncements
In the
first quarter of 2010, we adopted new standards for determining whether to
consolidate a variable interest entity. These new standards eliminated a
mandatory quantitative approach to determine whether a variable interest gives
the entity a controlling financial interest in a variable interest entity in
favor of a qualitatively focused analysis, and require an ongoing reassessment
of whether an entity is the primary beneficiary. The adoption of these new
standards did not impact our consolidated statements of operations or balance
sheets.
10
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
In
June 2009, the FASB issued an amendment, which changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. This amendment is effective for fiscal
years beginning after November 15, 2009. The adoption of this standard did
not have a material impact on our consolidated financial position, results of
operations, or cash flows.
In
October 2009, the FASB revised the accounting guidance for revenue
arrangements with multiple deliverables. The revision: (1) removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation
criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, (2) provides a
hierarchy that entities must use to estimate the selling price,
(3) eliminates the use of the residual method for allocation, and
(4) expands the ongoing disclosure requirements. This guidance is effective
for the Company beginning January 1, 2011 and can be applied prospectively or
retrospectively. The Company does not believe that this guidance will have a
material impact on its financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures
about Fair Value Measurements,” (“ASU 2010-06”) to amend topic ASC 820 “Fair
Value Measurements and Disclosures,” by improving disclosure requirements in
order to increase transparency in financial reporting. ASU 2010-06 requires that
an entity disclose separately the amounts of significant transfers in and out of
Level 1 and 2 fair value measurements and describe the reasons for the
transfers. Furthermore, an entity should present information about purchases,
sales, issuances, and settlements for Level 3 fair value measurements. ASU
2010-06 also clarifies existing disclosures for the level of disaggregation and
disclosures about input and valuation techniques. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements for the activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of ASU 2010-06, with regards to the disclosures
on transfers did not have a material impact on the Company’s condensed
consolidated financial statements.
2.
|
ACQUISITIONS
|
The
Company has completed seven acquisitions since it began operations in August
2008. The acquisitions were done to increase the Company’s skill sets
and to create sufficient critical mass to be able to obtain prime
contracts. All of the acquisitions resulted in the Company recording
goodwill and other intangibles. The goodwill was a result of the
acquisitions’
focus on acquiring cleared personnel to expand our presence with our main
customer. The value of the cleared personnel is what caused
the majority of the goodwill from the transaction and drove much of the purchase
price. Several of the acquisitions involved the issuance of Company
stock. The stock issuance price was determined by negotiation between
the parties. The transaction costs expensed for the completed
acquisitions totaled $863.
Details
of the five acquisitions completed since January 1, 2009 are outlined
below:
11
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Embedded
Systems Design, Inc.
On July
23, 2009, KEYW acquired the majority of the assets of Embedded Systems Design,
Inc. (“ESD”) under an asset purchase agreement for a total purchase price of
approximately $3.4 million in cash and 135,052 shares valued at $5.50 per
share. As a result of this transaction, the Company recorded $1.2
million in intangible assets primarily related to the value of contracts
acquired that have an estimated useful life of five years. The
goodwill is not amortizable for financial reporting but is amortizable for
income tax purposes over fifteen years.
ESD’s
capabilities include system and software engineering, hardware and firmware
engineering, and Field Programmable Gate Array design solutions. The
Company acquired 25 employees, most of whom have U.S. Government security
clearances.
Leading
Edge Design & Systems, Inc.
On
October 29, 2009, KEYW acquired the government contracting assets of Leading
Edge Design & Systems, Inc. (“LEDS”) under an asset purchase agreement for a
total purchase price of approximately $8.0 million in cash. This
purchase price includes several performance criteria including retention of the
acquired employees for specified terms. Should employees not be
retained by KEYW for those specified times, the purchase price will be
reduced. As of September 30, 2010, the Company has recognized $600 of
non-operating income as a result of three employees originating from the LEDS
acquisition that were terminated. As a result of this
acquisition, the Company has recorded $1.0 million in intangibles related to the
value of the acquired contracts that have an estimated useful life of three
years. The goodwill is not amortizable for financial reporting
but is amortizable for income tax purposes over fifteen years.
The LEDS
team has been a highly valued provider of development, implementation and
integration of large-scale, end-to-end solutions for the intelligence community
for many years. The Company acquired 28 employees and subcontractors
most of which have U.S. Government security clearances.
General
Dynamics Advanced Information Systems, Inc.
On
December 8, 2009, KEYW acquired certain assets of the Systems Engineering and
Technical Assistance unit of General Dynamics Advanced Information Systems, Inc.
(“Recon”) under an asset purchase agreement for a total purchase price of $7.5
million in cash. As a result of this acquisition, the Company has
recorded $0.9 million of intangibles exclusively related to the value of
contracts acquired that have an estimated useful life of three
years. The goodwill is not amortizable for financial reporting but is
amortizable for income tax purposes over fifteen years.
This team
has been involved with software and programmatic support for many years and has
built a trusted reputation with their client. The Company acquired 65
employees and subcontractors, all of whom have U.S. Government security
clearances.
The
Analysis Group, LLC
On
February 22, 2010, the Company acquired all of the ownership interests of the
principals of The Analysis Group, LLC (“TAG”) in exchange for approximately
$34.65 million in cash and debt and an earn-out of up to 3 million common shares
of the Company’s stock. The Company paid $23 million in cash and gave
the sellers two notes for $3.4 million and $7.6 million at
closing. The first note represents the escrow for the transaction and
bears an annual interest rate of 3%. The second note bears an
interest rate of 8%. Both notes are due the earlier of February 28,
2011 or within seven days of an initial public offering completed by the
Company. The Company has recorded $10,457 of intangibles exclusively
related to the value of contracts acquired that have an estimated useful life of
3 years. The goodwill is not amortizable for financial reporting but
is amortizable for income tax purposes over fifteen years.
The
earn-out shares are contingent upon achieving certain average revenue and margin
thresholds for calendar years 2010 and 2011. Should total revenue
exceed approximately $135 million and gross margins exceed 20% for the two year
period, additional cash will be paid to the sellers in a predetermined formula
based on those two measuring criteria. The Company is accounting for
the contingent earn-out shares under the liability method, which requires the
contingency shares to be revalued at each balance sheet date to the fair market
value of the stock. The contingent shares were recorded at a $9.25
per share value at acquisition. The total potential value of the
transaction was approximately $61 million. In June 2010, the Company
reduced the amount of the accrued earn-out to 2 million common shares based on
the operating results and current forecast for TAG and relative expected
performance to the earn-out targets. As a result of the adjustment,
the Company recognized $9,250 of non-operating income. In September
2010, the Company reduced the amount of the accrued earn-out to 1 million common
shares based on the operating results and current forecast for TAG and relative
expected performance to the earn-out targets. As a result of the
adjustment, the Company recognized an additional $9,250 of non-operating
income.
12
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
In
connection with the completion of the Company’s initial public offering, the
Company repaid both of the TAG seller notes in October 2010, and the
approximately $3.4 million due under the escrow note was placed in escrow to be
held until February 2011 to satisfy indemnity claims against the
Sellers.
TAG has
distinguished itself as a provider of high performance solutions to the
Department of Defense, particularly Air Force Intelligence, and to the National
Security community in general. The Company acquired approximately 65 employees,
most of whom have U.S. government clearances.
Insight
Information Technology, LLC
On March
12, 2010, the Company acquired all of the ownership interests of the principal
of Insight Information Technology, LLC (“IIT”) for $8.2 million and 250,000
shares of KEYW common stock valued at $9.25 per share for a total purchase price
of approximately $10.6 million. The Company has recorded $1,897 of
intangibles exclusively related to acquired contracts and trade name that have
an estimated useful life of 3 years. The goodwill is not amortizable
for financial reporting but is amortizable for income tax purposes over fifteen
years.
IIT is a
customer-focused information technology and professional services firm that
specializes in the support of design, development, and delivery of
state-of-the-art technology solutions, systems engineering and management
consulting services. The Company acquired approximately 36 employees,
most of whom have U.S. government clearances.
The total
purchase price paid for the acquisitions described above have been allocated as
follows:
TAG
|
IIT
|
ESD
|
LEDS
|
Recon
|
||||||||||||||||
Cash
|
$ | 1,178 | $ | 178 | $ | - | $ |
-
|
$ |
-
|
||||||||||
Current
assets, net of cash acquired
|
7,622 | 697 | 65 | 14 | - | |||||||||||||||
Fixed
assets
|
18 | 60 | 11 | 25 | - | |||||||||||||||
Intangibles
|
10,457 | 1,779 | 1,229 | 1,019 | 925 | |||||||||||||||
Goodwill
|
48,937 | 8,181 | 2,933 | 7,135 | 6,575 | |||||||||||||||
Total
Assets Acquired
|
68,212 | 10,895 | 4,238 | 8,193 | 7,500 | |||||||||||||||
Current
liabilities
|
6,447 | 338 | 121 | 139 | - | |||||||||||||||
Long-term
obligations
|
27,764 | - | - | - | - | |||||||||||||||
Total
Liabilities Assumed
|
34,211 | 338 | 121 | 139 | - | |||||||||||||||
Net
Assets Acquired
|
$ | 34,001 | $ | 10,557 | $ | 4,117 | $ | 8,054 | $ | 7,500 | ||||||||||
Net
Cash Paid
|
23,000 | 8,244 | 3,374 | 8,054 | 7,500 | |||||||||||||||
Debt
Issued to Sellers
|
11,001 | - | - | - | - | |||||||||||||||
Equity
Issued
|
- | 2,313 | 743 | - | - |
All
acquisitions were accounted for using the acquisition method of
accounting. Results of operations for each acquired entity are
included in the consolidated financial statements from the date of each
acquisition. Each of the acquisitions outlined above complements the
Company’s strategic plan to expand its classified intelligence offerings into
the national security marketplace. These acquisitions provide the Company with
access to key customers, security clearances and technical
expertise. As a result of these factors, the Company was willing to
pay a purchase price that resulted in recording goodwill as part of the purchase
price allocation.
13
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
The
tables below summarize the unaudited pro forma income statements for the first
nine months of 2010 and 2009 and the third quarter of 2009 assuming these
acquisitions had been completed on the first day of the year. There
is no pro forma presentation for the third quarter of 2010 as no acquisitions
occurred during that quarter. These pro forma statements do not
include any adjustments that may have resulted for synergies between the
acquisitions or for amortization of intangibles other than during the period the
acquired entities were part of the Company. The Recon numbers
represent the revenues and direct expenses for the acquired
contracts. The 2010 activity for TAG and Insight includes the
financial activity in 2010 prior to acquisition.
2009
|
2010
|
|||||||||||||||||||||||||||||||
Third Quarter
|
LEDS
|
Recon
|
TAG
|
Insight
|
KEYW
|
ADJ
|
Total
|
Total
|
||||||||||||||||||||||||
Revenue
|
1,776 | 3,429 | 10,547 | 1,386 | 10,058 |
-
|
27,196 | 28,992 | ||||||||||||||||||||||||
COGS
|
849 | 3,275 | 9,039 | 1,029 | 7,668 |
-
|
21,860 | 20,560 | ||||||||||||||||||||||||
Gross
profit
|
927 | 154 | 1,508 | 357 | 2,390 | - | 5,336 | 8,432 | ||||||||||||||||||||||||
Operating
expenses
|
785 | - | 887 | 162 | 4,827 | 1,154 | 7,815 | 8,721 | ||||||||||||||||||||||||
Operating
income
|
142 | 154 | 621 | 195 | (2,437 | ) | (1,154 | ) | (2,479 | ) | (289 | ) | ||||||||||||||||||||
Non-operating
expense(income)
|
- | - | (13 | ) | - | (76 | ) | 625 | 536 | (7,760 | ) | |||||||||||||||||||||
Income(loss)
before taxes
|
142 | 154 | 634 | 195 | (2,361 | ) | (1,779 | ) | (3,015 | ) | 7,471 | |||||||||||||||||||||
Tax
expense(benefit)
|
- | - | (652 | ) | - | (652 | ) | 3,063 | ||||||||||||||||||||||||
Net
income(loss)
|
142 | 154 | 634 | 195 | (1,709 | ) | (1,779 | ) | (2,363 | ) | 4,408 |
2010 YTD
|
||||||||||||||||||||
TAG
|
Insight
|
KEYW
|
ADJ
|
Total
|
||||||||||||||||
Revenue
|
3,854 | 1,066 | 78,651 |
-
|
83,571 | |||||||||||||||
COGS
|
3,227 | 904 | 55,631 |
-
|
59,762 | |||||||||||||||
Gross
profit
|
627 | 162 | 23,020 | - | 23,809 | |||||||||||||||
Operating
expenses
|
720 | 204 | 23,102 | 850 | 24,876 | |||||||||||||||
Operating
income
|
(93 | ) | (42 | ) | (82 | ) | (850 | ) | (1,067 | ) | ||||||||||
Non-operating
(income)expense
|
(5 | ) | - | (16,696 | ) | 500 | (16,201 | ) | ||||||||||||
(Loss)income
before taxes
|
(88 | ) | (42 | ) | 16,614 | (1,350 | ) | 15,134 | ||||||||||||
Tax
expense
|
- | - | 6,866 | - | 6,866 | |||||||||||||||
Net
(loss)income
|
(88 | ) | (42 | ) | 9,748 | (1,350 | ) | 8,268 |
2009 YTD
|
||||||||||||||||||||||||||||||||
LEDS
|
ESD
|
Recon
|
TAG
|
Insight
|
KEYW
|
ADJ
|
Total
|
|||||||||||||||||||||||||
Revenue
|
5,525 | 3,513 | 11,311 | 39,482 | 3,683 | 26,942 | - | 90,456 | ||||||||||||||||||||||||
COGS
|
2,639 | 2,068 | 10,474 | 33,185 | 2,702 | 19,701 | - | 70,769 | ||||||||||||||||||||||||
Gross
profit
|
2,886 | 1,445 | 837 | 6,297 | 981 | 7,241 | - | 19,687 | ||||||||||||||||||||||||
Operating
expenses
|
2,405 | 1,167 | - | 3,177 | 590 | 9,507 | 3,462 | 20,308 | ||||||||||||||||||||||||
Operating
income
|
481 | 278 | 837 | 3,120 | 391 | (2,266 | ) | (3,462 | ) | (621 | ) | |||||||||||||||||||||
Non-operating
expense(income)
|
- | 27 | - | (28 | ) | (1 | ) | 772 | 1,875 | 2,645 | ||||||||||||||||||||||
Income(loss)
before taxes
|
481 | 251 | 837 | 3,148 | 392 | (3,038 | ) | (5,337 | ) | (3,266 | ) | |||||||||||||||||||||
Tax
benefit
|
- | - | - | - | - | (546 | ) | - | (546 | ) | ||||||||||||||||||||||
Net
income(loss)
|
481 | 251 | 837 | 3,148 | 392 | (2,492 | ) | (5,337 | ) | (2,720 | ) |
14
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
3.
|
FAIR
VALUE MEASUREMENTS
|
We group
financial assets and financial liabilities measured at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. These
levels are:
Level 1
|
Valuations
for assets and liabilities traded in active exchange
markets. Valuations are obtained from available pricing sources
for market transactions involving identical assets or
liabilities.
|
Level 2
|
Valuations
for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing
services for identical or comparable assets or liabilities which use
observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in active markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
Level 3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
At
September 30, 2010, the Company valued its outstanding contingent shares from
the TAG acquisition at the market value of our stock as a Level 1
liability. For valuation purposes, we used the share price for our
Initial Public Offering that priced on September 30, 2010. The
Company reduced the total number of shares expected to be earned under the TAG
purchase agreement to 2 million shares from 3 million shares in June 2010 based
on current operating results and expected performance to the earn-out
targets. As the earn-out is accounted for under the liability method,
the Company recognized a pre-tax gain of $9,250 during the second quarter of
2010. The Company further reduced the total number of shares expected
to be earned under the TAG purchase agreement to 1 million shares at September
30, 2010. As a result, the Company recognized a gain of $9,250 during
the third quarter from the reduction in shares in the accrued
earn-out. Further, the Company adjusted the remaining shares subject
to earn-out to the $10 initial public offering price at September 30,
2010. This created a loss of $750 for the third
quarter. The net result in the income statement for the third quarter
of 2010 is a gain of $8,500.
The
Company did not have any financial assets or liabilities that were subject to
valuation at December 31, 2009.
4.
|
ACCOUNTS
RECEIVABLE
|
Accounts
receivable consist of the following:
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
Accounts Receivable
|
||||||||
Billed
AR
|
$ | 21,256 | $ | 5,068 | ||||
Unbilled
AR
|
459 | 4,341 | ||||||
Other
|
129 | - | ||||||
Total
AR
|
$ | 21,844 | $ | 9,409 |
Unbilled
amounts represent revenue recognized which could not be billed by the period end
based on contract terms. All of the unbilled amounts were billed
subsequent to period end. Retainages typically exist at the end of a
project and/or if there is a disputed item on an invoice received by a
customer. At September 30, 2010 and December 31, 2009, retained
amounts are insignificant and are expected to be collected subsequent to the
balance sheet date.
Management
does not currently have an allowance for doubtful accounts recorded because
management believes that all of the accounts receivable are fully
collectible.
Most of
the Company’s revenues are derived from contracts with the U.S. Government, in
which we are either the prime contractor or a subcontractor, depending on the
award.
15
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
5.
|
INVENTORIES
|
Inventories
at September 30, 2010 and December 31, 2009, consisted of work in process at
various stages of production and finished goods. This inventory, which consists
primarily of mobile communications devices, is valued at the lower of cost (as
calculated using the weighted average method) or market. The cost of
the work in process consists of materials put into production, the cost of labor
and an allocation of overhead costs. We determined that no reserve
for obsolescence or other consideration was necessary for the
inventory.
6.
|
PREPAID
EXPENSES
|
Prepaids
at September 30, 2010 and December 31, 2009 primarily consist of prepaid
insurance, rent and professional fees. Prepaids at December 31, 2009
also had approximately $672 of machinery purchases that were made in 2009 due to
incentives offered by the manufacturer for prepayment. This equipment
was delivered in early 2010.
7.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment are as follows:
September
30,
|
December
31,
|
|||||||
Property
& Equipment
|
2010
|
2009
|
||||||
Buildings
& Improvements
|
$ | 362 | $ | 123 | ||||
Manufacturing
Equipment
|
1,251 | 430 | ||||||
Office
Equipment
|
2,108 | 1,210 | ||||||
Total
|
$ | 3,721 | $ | 1,763 | ||||
Accumulated
Depreciation
|
(863 | ) | (333 | ) | ||||
Property
& Equipment, net
|
$ | 2,858 | $ | 1,430 |
Depreciation
expense charged to operations was $534 and $21 for the nine months ended
September 30, 2010 and September 30, 2009 and was $213 and $92 for the three
month periods ended September 30, 2010 and September 30, 2009,
respectively.
8.
|
AMORTIZATION
OF INTANGIBLE ASSETS
|
The
following values and amortization lives were assigned to intangible assets
(other than goodwill) for the acquisitions noted below:
September 30,
|
||||||||||||||||||
2010
|
||||||||||||||||||
Gross Book
|
Net Book
|
Accumulated
|
Useful life
|
|||||||||||||||
Acquisition
|
Intangible
|
Value
|
Value
|
Amortization
|
In years
|
|||||||||||||
S&H
|
Contracts
-Fixed Price Level of Effort
|
1,606 | 937 | 669 | 7 | |||||||||||||
S&H
|
Proposed
New business
|
3 | - | 3 | 2 | |||||||||||||
ICCI
|
Contracts
-Fixed Price Level of Effort
|
1,181 | 686 | 495 | 5 | |||||||||||||
ICCI
|
Contracts
-T&M and IDIQ
|
3,018 | 704 | 2,314 | 6 | |||||||||||||
ESD
|
Contracts
|
1,207 | 919 | 288 | 5 | |||||||||||||
ESD
|
New
Business & Non-compete
|
22 | - | 22 | 1 | |||||||||||||
LEDS
|
Contracts
|
1,019 | 509 | 510 | 3 | |||||||||||||
GD
|
Contracts
|
925 | 536 | 389 | 3 | |||||||||||||
TAG
|
Contracts
|
10,457 | 8,350 | 2,107 | 3 | |||||||||||||
IIT
|
Contracts
|
1,615 | 1,323 | 292 | 3 | |||||||||||||
IIT
|
Tradename
|
182 | 149 | 33 | 3 | |||||||||||||
14,114 |
The
Company recorded amortization expense of $4,454 and $1,461 for the nine months
ended September 30, 2010 and 2009 and $1,693 and $520 for
the three month periods ended September 30, 2010 and September 30, 2009,
respectively.
16
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
9.
|
DEBT
|
During
the first quarter of 2010, the Company entered into various debt agreements in
order to fund the acquisitions of TAG and IIT. All of the debt, with
the exception of the revolver, contains clauses that require the debt to be
retired within seven days of an initial public offering. See further
discussion of debt status in Note 12 - Subsequent Events.
On
February 22, 2010, the Company entered into two debt agreements with Bank of
America in conjunction with the closing of the TAG transaction. The
debt consists of an asset-backed revolver secured by the assets of the
Company. The revolver provides for up to $17,500 of borrowings based
on the receivables base of the Company. The revolver also has an
accordion feature that provides the ability for the Company to borrow up to an
additional $10,000 to pursue additional acquisitions subject to bank
approval. The interest rate on the debt is adjustable and is equal to
the LIBOR rate plus a margin that ranges from 2.0 – 2.5 basis points based on
certain financial ratios. The effective interest rate as of September
30, 2010 was 2.76%. The debt is due in February
2011. The outstanding balance on the loan as September 30, 2010 is
$10,500. The debt contains standard financial
covenants. The Company is in compliance with its debt covenants at
September 30, 2010.
The
second Bank of America debt was a $5,000 term loan that matured in February 2011
and began amortizing in May 2010 at $500 per month plus interest. The
interest rate on the debt was adjustable and was equal to the LIBOR rate plus a
margin that ranges from 2.0 – 2.5 basis points based on certain financial
ratios. This loan was repaid in full in August 2010.
In
conjunction with the TAG acquisition, the sellers took back debt totaling
$11,001 that matures on February 28, 2011. The debt is broken into
two segments with the first amount of $3,400 bearing interest at 3% and the
remaining $7,601 bearing interest at 8%. This debt is subordinate to
the Bank of America debt.
In March
and April 2010, the Company borrowed $8,250 from five shareholders and/or Board
members. The terms of the debt are 8% interest, 20,000 warrants per
million financed and a maturity date of March 2012. If the debt
remains unpaid at maturity, the Company will issue additional warrants in the
same amount as originally issued. The strike price of the warrants is
$9.25 and the warrants expire seven years from issuance. The warrant
valuation, as calculated using the Black-Scholes method, is being treated as an
original issue discount with the expense being recognized as non-cash interest
expense over the life of the loans. The Company recognized the
remaining original issue discount ($450) as interest expense on September 30,
2010. The carrying value of the debt, including accrued interest, at
September 30, 2010 is $8,672.
10.
|
SHARE-BASED
COMPENSATION
|
On
December 29, 2009, the Company, in conjunction with the corporate
reorganization, adopted The KEYW Holding Corporation 2009 Stock Incentive
Plan. The plan terms are similar to the previous 2008 plan, except
that the new plan has a maximum amount of shares available for issuance of
12,000,000 with a soft cap of 12% of the outstanding shares available for
issuance. The 2009 plan provides for the issuance of stock options,
restricted stock and restricted stock units.
Stock
Options
The
Company generally issues stock option awards that vest over varying periods,
ranging from three to five years, and have a ten-year life. We
estimate the fair value of stock options using the Black-Scholes option-pricing
model. Because our common stock did not trade publicly until October
1, 2010, we did not use historical data to determine volatility of our
stock. We determined volatility by using the historical stock
volatility of public companies in our industry with similar
characteristics. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by persons who receive
equity awards. All option awards terminate within ninety days or
sooner after termination from the Company except as provided in certain
circumstances with regard to our senior executive employment
agreements.
The
option grants during the first nine months of 2010 consist of options issued to
new hires, employees acquired through acquisitions, or discretionary
awards. The options issued prior to the IIT acquisition were issued
with a $5.50 strike price, options associated with the IIT acquisition and hires
through July 15, 2010 were issued with a $9.25 strike price, and all options
after July 15, 2010 were issued with a $10 strike price. All equity
issuances after September 30, 2010 will be priced at fair market value based
upon our publicly-traded share price on the date of grant.
17
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
The
Black-Scholes model requires certain inputs related to dividend yield, risk-free
interest rate, expected volatility and forfeitures in order to price the option
values. During 2010, our assumptions related to these inputs were as
follows:
-Dividend
yield was zero as we have no current intentions to pay any
dividends
-Risk-free
interest rate ranging from 1% - 3%
-Expected
volatility ranging from 28.35% - 38.55%
-Forfeitures
ranging from 15% - 30%
A summary
of stock option activity for the period ended September 30, 2010 is as
follows:
Option
|
Weighted Average
|
|||||||||||
Number of Shares
|
Exercise Price
|
Exercise Price
|
||||||||||
Outstanding,
January 1, 2010
|
1,032,250 | |||||||||||
Granted
|
403,500 | $ | 5.50 - $10.00 | $ | 8.31 | |||||||
Exercised
|
(250 | ) | $ | 5.50 | $ | 5.50 | ||||||
Cancelled
|
(65,125 | ) | $ | 5.00 - $9.25 | $ | 5.67 | ||||||
Options
Outstanding, September 30, 2010
|
1,370,375 |
All stock
based compensation has been recorded as part of operating
expenses. Accounting standards require forfeitures to be estimated at
the time an award is granted and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Forfeiture estimates
are disclosed in the information surrounding the option grants
above. For the periods ended September 30, 2010 and 2009, share-based
compensation expense is based on awards ultimately expected to vest and has been
reduced for estimated forfeitures. The total unrecognized stock
compensation expense at September 30, 2010 is approximately $1,962, which will
be recognized over four years.
Total Options Outstanding and Exercisable - All Plans
|
||||||||||||||
Exercise
|
Shares
|
Shares
|
Weighted Average
|
|||||||||||
Price
|
Outstanding
|
Exercisable
|
Remaining Life (yrs)
|
|||||||||||
$ | 5.00 | 155,000 | 82,072 | 8.0 | ||||||||||
$ | 5.50 | 933,750 | 328,296 | 9.1 | ||||||||||
$ | 9.25 | 197,125 | 49,286 | 9.6 | ||||||||||
$ | 10.00 | 84,500 | 21,126 | 9.8 | ||||||||||
1,370,375 | 480,780 |
2009
Plan
|
||||
Total
options available to issue
|
1,864,464 | |||
Total
options outstanding or exercised
|
636,875 | |||
Total
options remaining
|
1,227,589 |
Restricted
Stock Awards
During
2010, the Company has issued 77,500 restricted shares of common stock to new
hires. These shares vest ratably over three to five years and have no
exercise price. The expense for these shares will be recognized over
the vesting life of each individual tranche of shares based upon the fair value
of a share of stock at the date of grant.
11.
|
WARRANTS
|
On March
15, 2010, one of the Company’s largest shareholders elected to exercise
1,022,728 warrants for a total exercise price of approximately $4.5
million. The proceeds from this issuance were used to pay down the
outstanding balance on the revolver.
18
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
In
conjunction with the IIT acquisition, the Company issued 215,000 warrants to
purchase our common stock at $9.25 per share. These warrants vested
immediately and expire seven years from issuance. The costs
associated with these warrants were treated as an original issue discount to the
debt and will be expensed over the two-year note term. The total
original issue discount was approximately $584 as calculated using the
Black-Scholes model.
As of
September 30, 2010, outstanding warrants were as follows:
Warrants Exercisable and
Outstanding
|
||||||||||||||
Exercise
|
Warrants
|
Warrants
|
Weighted Average
|
|||||||||||
Price
|
Outstanding
|
Exercisable
|
Remaining Life (yrs)
|
|||||||||||
$ | 4.00 | 2,198,625 | 2,198,625 | 4.8 | ||||||||||
$ | 5.50 | 2,400,181 | 2,400,181 | 8.9 | ||||||||||
$ | 9.25 | 215,000 | 215,000 | 9.6 | ||||||||||
4,813,806 | 4,813,806 |
12.
|
SUBSEQUENT
EVENTS
|
In
connection with the preparation of its financial statements for the quarter
ended September 30, 2010, the Company has evaluated events that occurred between
September 30, 2010 and November 10, 2010, the date of filing of this Quarterly
Report, to determine whether any of these events required recognition or
disclosure in the third quarter 2010 financial statements. The Company is not
aware of any subsequent events which would require recognition or disclosure in
the financial statements except as discussed below.
On
October 1, 2010, the Company’s common stock began trading on the NASDAQ exchange
under the ticker symbol KEYW. This represents the completion of the
Company’s initial public offering (“IPO”) that priced at $10.00 per share after
the market closed on September 30, 2010. On October 4, 2010, the
Company announced that the underwriters of the IPO exercised their overallotment
option to purchase an additional 1,365,000 shares. The Company sold a total of
10,465,000 shares in the IPO, including the over-allotment shares and 825,910
shares sold by selling stockholders. This provided the Company with
total IPO proceeds, after underwriter fees but before expenses, of approximately
$89.4 million. The Company did not receive any proceeds with respect
to the sale of shares by selling stockholders. Subsequent to the IPO,
the Company paid in full the subordinated debt under the TAG seller notes and
the debt issued Board members/shareholders in March/April 2010, as required
under the terms of such debt, and paid down the Bank of America revolver to
$0. See Note 9 – Debt, above. Immediately after the debt
payments, the Company had approximately $59 million of cash on hand including
net proceeds from the offering.
19
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion provides information which management believes is relevant
to an assessment and an understanding of the Company’s operations and financial
condition. This discussion should be read in conjunction with the
attached unaudited consolidated financial statements and accompanying notes as
well as our prospectus dated September 30, 2010 and filed with the Securities
and Exchange Commission on October 1, 2010 pursuant to Rule 424(b)(4) under the
Securities Act of 1933, as amended (the “Prospectus”).
FORWARD-LOOKING
STATEMENTS
The
matters discussed in this Quarterly Report may constitute forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, activity
levels, performance or achievements to be materially different from any future
results, activity levels, performance or achievements expressed or implied by
such forward-looking statements. In some cases, you can identify
these statements by forward-looking words such as “could”, “expect”, “estimate”,
“may”, “potential”, “will”, and “would”, or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other forward-looking
information. There may be events in the future that we are not able
to predict or control accurately, and numerous factors may cause events, our
results of operations, financial performance, achievements, or industry
performance, to differ materially from those reflected in the forward-looking
statements. The factors listed in the section captioned “Risk
Factors,” contained in our Prospectus, as well as any cautionary language in
this Quarterly Report, provide examples of such risks, uncertainties, and
events.
You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Quarterly Report. Subsequent events and
developments may cause our views to change. While we may elect to
update the forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so.
DESCRIPTION
OF THE COMPANY
We
provide mission-critical cybersecurity and cyber superiority solutions to
defense, intelligence and national security agencies. Our solutions, services
and products support the collection, processing, analysis, and use of
intelligence data and information in the domain of cyberspace. Cyberspace is the
global environment of data and information that encompasses all parts of the
electromagnetic spectrum in which intelligence data may exist or
transit.
Our
current customers include the National Security Agency (NSA), other intelligence
agencies, the Department of Defense (including major agencies and branches
within the Department of Defense) and other federal defense and law enforcement
agencies. We believe our innovative solutions, understanding of intelligence and
national security missions, management’s long-standing and successful customer
relationships and significant management and operational capabilities position
us to continue our growth. We are highly focused on assisting our customers in
achieving their mission of superiority in cyberspace (cyber superiority), both
defensively and offensively, within the entire domain of cyberspace, and doing
so in time to observe, respond, and, where possible, prevent threat events,
actions and agents from inflicting harm.
KEYW’s
primary areas of expertise include:
|
·
|
providing
engineering services and solutions that help our customers to solve
discreet and complex cybersecurity, cyber superiority, and intelligence
challenges;
|
|
·
|
providing
specialized training, field support, and test and evaluation
services;
|
|
·
|
collecting
data and information in cyberspace, encompassing the entire
electromagnetic spectrum;
|
|
·
|
processing
data and information from cyberspace to make it accessible to a wide range
of analytical needs and resources;
|
20
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
|
·
|
analyzing
data and information that have been collected, processed, correlated, and
made easily accessible to transform them into usable information for our
customers; and
|
|
·
|
impacting,
or creating integrated intelligence data and information that is useful in
observing, preventing, and responding to known and emerging threat events,
actions and agents on a global scale, often in real
time.
|
We
provide a full range of engineering services as well as fully integrated
platforms that support the entire intelligence process, including collection,
processing, analysis and impact. Our platforms include products that we
manufacture, as well as hardware and software that we integrate using the
engineering services of our highly skilled and security-cleared workforce. A
hallmark of our capabilities is our ability to respond quickly and decisively to
demanding and emergent customer requirements, with agile processes and methods
that enable us to satisfy requirements that are constantly changing to meet an
agile, aggressive and ever-changing threat environment.
CRITICAL
ACCOUNTING POLICIES
Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and determine whether contingent assets and
liabilities, if any, are disclosed in the financial statements. On an
ongoing basis, we evaluate our estimates and assumptions, including those
related to long-term contracts, product returns, bad debts, inventories, fixed
asset lives, income taxes, environmental matters, litigation, and other
contingencies. These estimates and assumptions are described in more
detail in our Prospectus. We base our estimates and assumptions on
historical experience and on various factors that are believed to be reasonable
under the circumstances, including current and expected economic conditions, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from our estimates
under different assumptions or conditions. There have been no
material changes to our critical accounting policies, estimates and assumptions
or the judgments affecting the application of those estimates and assumptions
since the filing of our Prospectus.
COMPARISON
OF THREE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009
The
following discussion and analysis should be read in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of the Company appearing elsewhere in this report. In
addition, see Note 2 – Acquisitions to our unaudited financial statements
included in this Quarterly Report for specific information with respect to the
assumptions and adjustments made in calculating the pro forma financial
information for the three month period ended September 30, 2009 set forth
below.
Consolidated
Overview (000’s)
Three Months Ended September 30,
|
||||||||||||||||||||||||
2010
|
|
2009
|
Pro Forma 2009
|
|||||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
Revenue
|
$ | 28,992 | 100 | % | $ | 10,058 | 100 | % | $ | 27,196 | 100 | % | ||||||||||||
Gross
Profit
|
$ | 8,432 | 29 | % | $ | 2,390 | 24 | % | $ | 5,336 | 20 | % | ||||||||||||
Loss
from Operations
|
$ | (289 | ) | -1 | % | $ | (2,437 | ) | -24 | % | $ | (2,479 | ) | -9 | % | |||||||||
Non-Operating
Income(Expense)
|
$ | 7,760 | 27 | % | $ | 76 | 1 | % | $ | (536 | ) | -2 | % |
21
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Revenue
for the quarter ended September 30, 2010, increased on a year-over-year basis by
$18,934 or 288%, as compared to the quarter ended September 30, 2009. The main
drivers for the increase were the four acquisitions that occurred subsequent to
September 30, 2009 including the assets of Leading Edge Design & Systems,
Inc., the assets of General Dynamics Advanced Information Systems, Inc., and the
corporate acquisitions of The Analysis Group, LLC and Insight Information
Technology, LLC. On a pro forma basis, revenue for the combined
entity for the three months ended September 30, 2009 was $27,196. The
increase in revenue between the actual 2010 and the pro forma 2009 quarterly
results is primarily due to a $1,900 increase in product revenue, increased
services under our new contract awards, and expansion of our existing contracts,
and also reflects lower contract revenue from our TAG acquisition in the third
quarter of 2009. The product revenue has increased due to the
expansion of product lines and increased penetration within our existing and new
customers. Our services revenue has grown within our major customer
as we have grown our footprint by winning prime contracts and added additional
billable positions on key contracts. The revenue generated from the
TAG acquisition in the third quarter of 2009 was approximately $4,049 more than
during the same quarter of 2010 due to the loss of TAG’s A5XP contract in July
2009 and a slowdown in Air Force contracting opportunities during
2010.
Gross
margin increased in both dollars and as a percentage of revenue in the quarter
ended September 30, 2010 as compared with the quarter ended September 30,
2009. The primary driver for the dollar increase is the acquisitions
described above. On a pro forma basis, assuming all of our 2009 and
2010 acquisitions had been completed on January 1, 2009, gross profit increased
by $3,097 due to increased services margins and a change in product
profitability from a warranty accounting change in September
2009. Our services gross margin was negatively impacted in 2009 by
several cost reimbursable contracting issues and the shutdown of the A5XP
contract. Our 2010 services gross margin percentage is in-line with
our expectations. In September 2009, warranty reserve accounting in
our products area was changed to recognize full revenue and cost accrual at the
time of sale. This negatively impacted gross margin as zero margin
revenue was recorded. Product gross margins for 2010 are more
consistent with our expectations.
Non-operating
income for the three months ended September 30, 2010 primarily consists of the
gain recognized on the reduction of the accrued earn-out from the TAG
acquisition offset by interest expense. The earn-out related to the
TAG acquisition is accounted for under the liability method of accounting that
requires changes in the fair value of the earn-out to be included in the income
statement. During the third quarter of 2010, the Company recognized
$8,500 of income from the reduction in the earn-out liability. This
amount was a combination of the decrease in shares expected to be earned of 1.0
million and a $0.75 increase in share price during the
quarter. During the same quarter the Company incurred interest
expense of approximately $1,005. There were no significant items in
the three month period ended September 30, 2009. The pro forma amount
for the quarter ended September 30, 2009, was predominantly interest
expense.
The loss
from operations decreased significantly in the quarter ended September 30, 2010
as compared with the quarter ended September 30, 2009, due primarily to the
increased gross profit. On a pro forma basis, assuming all of our
2009 and 2010 acquisitions had been completed on January 1, 2009, the loss from
operations was $2,479 in the quarter ended September 30, 2009. A
large component of our operating expense is the intangible amortization from our
acquisitions. Amortization expense totaled $1,692 in the quarter
ended September 30, 2010.
COMPARISON
OF NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009
The
following discussion and analysis should be read in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of the Company appearing elsewhere in this report. In
addition, see Note 2 – Acquisitions to our unaudited financial statements
included in this Quarterly Report for specific information with respect to the
assumptions and adjustments made in calculating the pro forma financial
information for the nine month period ended September 30, 2009 set forth
below.
Consolidated
Overview (000’s)
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2010
|
2009
|
Pro Forma 2009
|
||||||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
Revenue
|
$ | 78,651 | 100 | % | $ | 26,942 | 100 | % | $ | 90,456 | 100 | % | ||||||||||||
Gross
Profit
|
$ | 23,020 | 29 | % | $ | 7,241 | 27 | % | $ | 19,687 | 22 | % | ||||||||||||
Loss
from Operations
|
$ | (82 | ) | 0 | % | $ | (2,266 | ) | -8 | % | $ | (621 | ) | -1 | % | |||||||||
Non-Operating
Income(Expense)
|
$ | 16,696 | 21 | % | $ | (772 | ) | -3 | % | $ | (2,645 | ) | -3 | % |
22
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
Revenue
for the nine months ended September 30, 2010, increased on a year-over-year
basis by $51,709 or 292%, as compared to the nine months ended September 30,
2009. The main
drivers for the increase were the five acquisitions that occurred subsequent to
January 1, 2009 including the assets of Embedded Systems Design, Inc., Leading
Edge Design & Systems, Inc., and General Dynamics Advanced Information
Systems, Inc., and the corporate acquisitions of The Analysis Group, LLC, and
Insight Information Technology, LLC. On a pro forma basis, assuming
all of our 2009 and 2010 acquisitions had been completed on January 1, 2009,
revenue for the combined entity for the nine months ended September 30, 2009 was
$90,456. The decrease in revenue between the actual 2010 and the pro
forma 2009 results is primarily due to a $14,000 decrease in revenue from our
Air Force contracts, offset by significant increases in our product revenue,
increased services under our new contract awards, and expansion of our existing
contracts. In the third quarter of 2009, TAG lost the A5XP contract,
which had contributed approximately $13,000 of revenue in the first nine months
of 2009, with no comparable replacement in the first nine months of
2010. Additionally, our Air Force contracting opportunities have
significantly decreased in 2010, further reducing our 2010 revenue from that
customer. Product revenue has increased due to the expansion of
product lines and increased penetration within our existing and new
customers. Our services revenue, with the exception of the Air Force
services work, has grown within our major customer, as we have grown our
footprint by winning prime contracts and added additional billable positions on
key contracts.
Gross
margin increased in both dollars and as a percentage of revenue in the nine
months ended September 30, 2010 as compared with the nine months ended September
30, 2009. The primary driver for the dollar increase is the
acquisitions described above. On a pro forma basis, assuming all of
our 2009 and 2010 acquisitions had been completed on January 1, 2009, gross
profit increased by $3,333 due to increased services margins and an increase in
product profitability.
Non-operating
income for the nine months ended September 30, 2010 primarily consists of the
gain recognized on the reduction of the accrued earn-out from the TAG
acquisition and the gain from the LEDS acquisition accounting, offset by
interest expense. The earn-out related to the TAG acquisition is
accounted for under the liability method of accounting that requires changes in
the fair value of the earn-out to be included in the income
statement. During 2010, the Company has recognized $17,750 of income
from the reduction in the earn-out liability. This amount was a
combination of the decrease in shares expected to be earned of 2.0 million and a
$0.75 increase in share price since the earn-out was initially
recorded. The Company has reported a non-operating gain from
the LEDS acquisition due to certain identified staff acquired in the LEDS
acquisition that left prior to completing one year’s service with the
Company. The total income recognized has been $600. During
the same period, the Company incurred interest expense of approximately
$1,677. For the same period in 2009, non-operating expense primarily
consisted of warrants accounted for under the liability method that totaled
$823. These warrants were reclassified to equity accounting in
December 2009. The pro forma non-operating expense amount for the
nine months ended September 30, 2009, was predominantly warrant and interest
expense.
The loss
from operations decreased significantly in the nine months ended September 30,
2010 as compared with the nine months ended September 30, 2009, due primarily to
the increased gross profit. On a pro forma basis, assuming all of our
2009 and 2010 acquisitions had been completed on January 1, 2009, the loss from
operations was $621 in the nine months ended September 30, 2009. A
large component of our operating expense is the intangible amortization from our
acquisitions. Amortization expense totaled $4,454 in the nine months
ended September 30, 2010.
Liquidity
and Capital Resources
Cash and
cash equivalents totaled approximately $1,259 at September 30, 2010. Our working
capital, defined as current assets minus current liabilities, is negative $3,120
at September 30, 2010 as a result of our acquisition activity during the first
quarter of 2010. During that quarter, we paid a total of $27,629 in
cash for two acquisitions. This accounts for the majority of the
change in working capital from a positive $19,365 at December 31,
2009.
We
completed our initial public offering in October 2010 that provided the Company
with approximately $89 million in cash, net of underwriter discounts and
offering expenses. We used approximately $32 million of those funds
to repay all of our debt. Immediately, after repaying the debt, we
had approximately $77 million in working capital. We intend to use
those funds for working capital purposes and to fund additional
acquisitions. We anticipate that working capital needs will increase
as we continue to grow our revenue. The amount of additional working
capital that is required will depend on how much of our growth is through
self-performed labor and how much is subcontracted labor. The more
self-performed labor we have, the more working capital will be
required.
The
Company has an open line of credit with Bank of America which permits borrowings
of up to $17,500 based on eligible accounts receivable and EBITDA
requirements. This line also has a $10,000 accordion feature that
would permit the Company to borrow additional funds to complete an
acquisition.
23
THE KEYW
HOLDING CORPORATION AND SUBSIDIARIES
(Dollars
shown in 000’s except share and per share amounts)
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
In
addition to the risks inherent in our operations, we are exposed to financial,
market, political and economic risks. The following discussion
provides additional detail regarding our exposure to interest rates and foreign
exchange rate risks.
Interest
Rate Risk
At
September 30, 2010, the Company had approximately $10,500 outstanding under a
revolving credit facility with variable interest rates. The remainder
of our debt was fixed at 8%. We have not historically mitigated our
exposure to fluctuations in interest rates by entering into interest rate hedge
agreements, nor do we have any plans to do so in the immediate
future. As we have paid off all of our debt in connection with our
October 2010 initial public offering, any change in interest rates would be
immaterial to the Company.
Foreign
Exchange Risk
We
currently do not have any foreign currency risk and accordingly, estimate that
an immediate 10 percent change in foreign exchange rates would have no impact on
our reported net loss. We do not currently utilize any derivative
financial instruments to hedge foreign currency risks.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Based on
management’s evaluation (with the participation of our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by
this report, our CEO and CFO have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) are effective to provide
reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. There have not
been any changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended September 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
24
PART
II - OTHER
INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
ITEM 1A.
|
RISK
FACTORS
|
We are
subject to several risk factors that could have a direct and material impact on
the operations of the Company and the market price of our common
stock. Those risk factors are disclosed under “Risk Factors” in our
Prospectus.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
|
(a) Sales
of Unregistered Securities
From
January 1, 2010 through September 30, 2010, we granted stock options
to purchase an aggregate of 403,500 shares of our common stock, with exercise
prices ranging from $5.50 - $10.00 per share, to employees pursuant to our 2009
Stock Incentive Plan. From January 1, 2010 through September 30,
2010, our employees exercised options to purchase 250 shares of our common stock
at an average purchase price of $5.50 per share for an aggregate purchase price
of $1,375.
From
January 1, 2010 through September 30, 2010, we granted 77,500 restricted
shares of our common stock to three employees. The restricted stock
vests annually over periods of three to five years from the grant
date.
From
January 1, 2010 through September 30, 2010, we granted 215,000 warrants in
conjunction with the subordinated debt raised for the IIT
acquisition. These shares have a strike price of $9.25 and expire
seven years from issuance.
No
underwriters were involved in the foregoing sales of securities. These
securities were issued pursuant to written compensatory plans or arrangements
with our employees, directors and consultants, in reliance on the exemption
provided by Rule 701 promulgated under the Securities Act or pursuant to
Section 4(2) under the Securities Act. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.
All of
the foregoing securities, are deemed restricted securities for purposes of the
Securities Act, and all certificates representing such securities included
appropriate legends setting forth that such securities had not been registered
and the applicable restrictions on transfer.
25
ITEM
6.
|
EXHIBITS
|
3.1
|
Form
of Amended and Restated Articles of Incorporation of the Company
(1)
|
|
3.2
|
Form
of Amended and Restated Bylaws of the Company (1)
|
|
3.3
|
Articles
of Incorporation of the Company, as filed on December 29, 2009
(1)
|
|
3.4
|
Bylaws
of the Corporation (1)
|
|
3.5
|
Articles
of Merger of The KEYW Merger Subsidiary, Inc. with and into The KEYW
Corporation, as filed on December 29, 2009, and Certificate of Correction
thereto (1)
|
|
3.6
|
Amendment
to Bylaws of the Corporation (1)
|
|
10.1*
|
The
KEYW Corporation 2008 Stock Incentive Plan (1)
|
|
10.2*
|
Form
of Incentive Stock Option Agreement for grants pursuant to The KEYW
Corporation 2008 Stock Incentive Plan (1)
|
|
10.3*
|
Form
of Non-Qualified Stock Option Agreement for grants pursuant to The KEYW
Corporation 2008 Stock Incentive Plan (1)
|
|
10.4*
|
Form
of Restricted Stock Agreement for grants pursuant to The KEYW Corporation
2008 Stock Incentive Plan (1)
|
|
10.5*
|
The
KEYW Holding Corporation 2009 Stock Incentive Plan (1)
|
|
10.6*
|
Form
of Incentive Stock Option Agreement for grants pursuant to The KEYW
Holding Corporation 2009 Stock Incentive Plan (1)
|
|
10.7*
|
Form
of Non-Qualified Stock Option Agreement for grants pursuant to The KEYW
Holding Corporation 2009 Stock Incentive Plan (1)
|
|
10.8*
|
Form
of Restricted Stock Agreement for grants pursuant to The KEYW Holding
Corporation 2009 Stock Incentive Plan (1)
|
|
10.9*
|
Form
of The KEYW Corporation Non-Qualified Stock Options Agreement for non-plan
grants (1)
|
|
10.10*
|
Form
of The KEYW Corporation Restricted Stock Agreement for non-plan grants
(1)
|
|
10.11*
|
Long-Term
Incentive Plan (1)
|
|
10.12*
|
Annual
Incentive Plan (1)
|
|
10.13*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and
Kimberly DeChello (1)
|
|
10.14*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and Frederick
Funk (1)
|
|
10.15*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and Edwin
Jaehne (1)
|
|
10.16*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and John
Krobath (1)
|
|
10.17*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and Leonard
E. Moodispaw (1)
|
26
ITEM 6.
|
EXHIBITS (Continued)
|
|
10.18*
|
Employment
Agreement, dated June 16, 2010, between The KEYW Corporation and Mark
Willard (1)
|
|
10.19
|
Amended
and Restated Registration Rights Agreement, dated as of May 29, 2009,
between the Company and certain stockholders named therein.
(1)
|
|
10.20
|
Form
of Amended and Restated Warrant (1)
|
|
10.21
|
Credit
and Security Agreement, dated February 22, 2010, by and between The KEYW
Holding Corporation, The KEYW Corporation, Integrated Computer Concepts,
Incorporated, The Analysis Group, LLC and S&H Enterprises of Central
Maryland, Inc., as borrowers, and Bank of America, N.A., as lender.
(1)
|
|
10.22
|
First
Amendment to Credit and Security Agreement and Joinder, Assumption and
Ratification Agreement, dated March 16, 2010, by and among The KEYW
Holding Corporation, The KEYW Corporation, Integrated Computer Concepts,
Incorporated, The Analysis Group, LLC and S&H Enterprises of Central
Maryland, Inc., as original borrowers, Insight Information Technology,
LLC, as additional borrower, and Bank of America, N.A., as lender.
(1)
|
|
10.23
|
Covenant
Not to Convey and Negative Pledge Agreement, dated February 22, 2010 by
and among The KEYW Corporation, The KEYW Holding Corporation, Integrated
Computer Concepts, Incorporated, The Analysis Group, LLC and S&H
Enterprises of Central Maryland, Inc., as borrowers, and Bank of America,
N.A., as lender. (1)
|
|
10.24
|
Revolving
Loan Note, dated February 22, 2010 (1)
|
|
10.25
|
Term
Loan Note, dated February 22, 2010 (1)
|
|
10.26
|
Contribution
Agreement, dated February 22, 2010, by and among TAG Holdings LLC, The
Analysis Group, LLC, The KEYW Holding Corporation, The KEYW Corporation,
and certain other parties. (1)
|
|
10.27
|
Subordinated
Unsecured Promissory Note, dated February 22, 2010, in the amount of
$8,251,076 (1)
|
|
10.28
|
Subordinated
Unsecured Promissory Note, dated February 22, 2010, in the amount of
$3,400,000 (1)
|
|
10.29
|
Form
of Note for IIT financing (1)
|
|
10.31
|
Amended
and Restated Stockholders Agreement dated as of May 29, 2009 between the
Company and certain stockholders named therein (1)
|
|
10.32*
|
The
KEYW Holding Corporation 2010 Employee Stock Purchase Plan
(1)
|
|
21.1
|
Subsidiaries
of the Registrant (1)
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes –Oxley
Act of 2002 (filed herewith)
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
32.1
|
Certification
of the Chief Executive Officer and the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
* Indicates
management contract or compensatory arrangement.
(1)
|
Incorporated
by reference to the corresponding Exhibit number to the Registrant’s
Registration Statement on Form S-1, as amended (File No.
333-16768).
|
27
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 10th day of
November 2010.
THE
KEYW HOLDING CORPORATION
By:
|
/s/ Leonard E. Moodispaw
|
|
Leonard E. Moodispaw | ||
President and Chief Executive Officer |
By:
|
/s/ John E. Krobath
|
|
John E. Krobath | ||
Chief Financial Officer |
28