retail_10q-123107.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31, 2007
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________________________________ to
______________________________
Commission
File Number: 0-23049
RETAIL
PRO, INC.
(Formerly
known as Island Pacific, Inc.)
(Exact
name of registrant as specified in its charter)
DELAWARE
|
33-0896617
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
3252
Holiday Court, Suite 226, La Jolla, CA
|
92037
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(858)
550-3355
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one:)
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
Common
stock, $0.0001 Par Value – 61,340,195 shares as of May 29, 2008.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
PART
I. - FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Condensed Financial Statements
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of December 31, 2007 and March 31,
2007
|
3
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the Three Months and the
Nine Months Ended
|
|
|
December
31, 2007 and 2006
|
4
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the Nine Months Ended
December 31, 2007
|
|
|
and
2006
|
5
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
6
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
|
|
|
Item
4.
|
Controls
and Procedures
|
24
|
|
|
|
PART
II. - OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
24
|
|
|
|
Item
1A.
|
Risk
Factors
|
24
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
32
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
32
|
|
|
|
Item
5.
|
Other
Information
|
32
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
32
|
|
|
|
SIGNATURES
|
|
33
|
ITEM
1. FINANCIAL STATEMENTS
RETAIL
PRO, INC. AND SUBSIDIARIES
(Formerly
known as Island Pacific, Inc.)
CONSOLIDATED
CONDENSED BALANCE SHEETS
(in
thousands, except share amounts)
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,659 |
|
|
$ |
565 |
|
Accounts
receivable, net of allowance for doubtful accounts of $449 and $386,
respectively
|
|
|
2,718 |
|
|
|
2,913 |
|
Other
receivables
|
|
|
98 |
|
|
|
136 |
|
Note
receivable
|
|
|
3,000 |
|
|
|
- |
|
Prepaid
expenses and other current assets
|
|
|
399 |
|
|
|
261 |
|
Total
current assets
|
|
|
8,874 |
|
|
|
3,875 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
303 |
|
|
|
307 |
|
Goodwill,
net
|
|
|
13,511 |
|
|
|
22,984 |
|
Other
intangible assets, net
|
|
|
8.197 |
|
|
|
12,574 |
|
Deferred
royalties and related maintenance inter-co’s
|
|
|
1,168 |
|
|
|
- |
|
Other
assets
|
|
|
411 |
|
|
|
315 |
|
Total
assets
|
|
$ |
32,464 |
|
|
$ |
40,055 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
675 |
|
|
$ |
3,537 |
|
Current
portion of long-term debt
|
|
|
6,562 |
|
|
|
7,185 |
|
Accounts
payable
|
|
|
3,230 |
|
|
|
1,286 |
|
Accrued
audit fees
|
|
|
69 |
|
|
|
300 |
|
Accrued
interest and financing costs
|
|
|
685 |
|
|
|
1,202 |
|
Accrued
employment expenses
|
|
|
1,251 |
|
|
|
1,029 |
|
Accrued
accounts payable
|
|
|
2,302 |
|
|
|
801 |
|
Other
Accrued expenses
|
|
|
1,758 |
|
|
|
- |
|
Deferred
revenue
|
|
|
3,452 |
|
|
|
5,599 |
|
Income
taxes payable
|
|
|
127 |
|
|
|
127 |
|
Total
current liabilities
|
|
|
20,111 |
|
|
|
21,066 |
|
|
|
|
|
|
|
|
|
|
Debt
due to stockholders, less current maturities
|
|
|
2,515 |
|
|
|
2,515 |
|
Convertible
debentures, less current maturities
|
|
|
- |
|
|
|
2,520 |
|
Deferred
revenue
|
|
|
1,498 |
|
|
|
1,126 |
|
Accrued
price protection
|
|
|
1,737 |
|
|
|
1,736 |
|
Deferred
rent
|
|
|
212 |
|
|
|
206 |
|
Total
liabilities
|
|
|
26,073 |
|
|
|
29,169 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 5,000,000 shares authorized;
|
|
|
- |
|
|
|
- |
|
Common
stock, $.0001 par value; 250,000,000 shares authorized; 60,043,297 and
59,842,047 shares issued and outstanding, respectively
|
|
|
6 |
|
|
|
6 |
|
Additional
paid-in capital
|
|
|
92,963 |
|
|
|
92,859 |
|
Accumulated
Deficit
|
|
|
(
86,578 |
) |
|
|
(81,979 |
) |
Total
stockholders' equity
|
|
|
6,391 |
|
|
|
10,886 |
|
Total
liabilities and stockholders' equity
|
|
$ |
32,464 |
|
|
$ |
40,055 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
RETAIL
PRO, INC. AND SUBSIDIARIES
(Formerly
known as Island Pacific, Inc.)
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
3,043 |
|
|
$ |
3,102 |
|
|
$ |
9,290 |
|
|
$ |
9,650 |
|
Services
|
|
|
438 |
|
|
|
358 |
|
|
|
1,223 |
|
|
|
1,049 |
|
Net
sales
|
|
|
3,481 |
|
|
|
3,460 |
|
|
|
10,513 |
|
|
|
10,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
927 |
|
|
|
946 |
|
|
|
2,617 |
|
|
|
2,672 |
|
Services
|
|
|
285 |
|
|
|
203 |
|
|
|
677 |
|
|
|
643 |
|
Cost
of sales
|
|
|
1,212 |
|
|
|
1,149 |
|
|
|
3,294 |
|
|
|
3,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,269 |
|
|
|
2,311 |
|
|
|
7,219 |
|
|
|
7,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
development
|
|
|
839 |
|
|
|
647 |
|
|
|
2,660 |
|
|
|
1,550 |
|
Depreciation
and amortization
|
|
|
79 |
|
|
|
83 |
|
|
|
225 |
|
|
|
251 |
|
Selling,
general and administrative
|
|
|
3,789 |
|
|
|
2,551 |
|
|
|
9,260 |
|
|
|
7,114 |
|
Total
expenses
|
|
|
4,707 |
|
|
|
3,281 |
|
|
|
12,145 |
|
|
|
8,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,438 |
) |
|
|
(970 |
) |
|
|
(4,926 |
) |
|
|
(1,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(1 |
) |
|
|
(15 |
) |
|
|
(6 |
) |
|
|
27 |
|
Interest
expense
|
|
|
(808 |
) |
|
|
(414 |
) |
|
|
(2,003 |
) |
|
|
(1,193 |
) |
Finance
charges
|
|
|
(342 |
) |
|
|
(1,990 |
) |
|
|
(1,593 |
) |
|
|
(5,072 |
) |
Loss
on foreign exchange
|
|
|
(10 |
) |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
(2 |
) |
Other
expenses
|
|
|
(1,161 |
) |
|
|
(2,421 |
) |
|
|
(3,618 |
) |
|
|
(6,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(3,599 |
) |
|
|
(3,391 |
) |
|
|
(8,544 |
) |
|
|
(7,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (benefits)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(3,599 |
) |
|
|
(3,391 |
) |
|
|
(8,544 |
) |
|
|
(7,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations net of taxes
|
|
|
(90 |
) |
|
|
1,535 |
|
|
|
2,152 |
|
|
|
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
from the sale of discontinued operations
|
|
|
1,792 |
|
|
|
- |
|
|
|
1,792 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders
|
|
$ |
(1,897 |
) |
|
$ |
(1,856 |
) |
|
$ |
(4,600 |
) |
|
$ |
(5,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders from continuing
operations
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.015 |
) |
|
$ |
(0.12 |
) |
Net gain
available to common stockholders from discontinued
operations
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.07 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted-average common shares outstanding
|
|
|
60,439,140 |
|
|
|
62,267,024 |
|
|
|
60,051,624 |
|
|
|
66,417,210 |
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
RETAIL
PRO, INC. AND SUBSIDIARIES
(Formerly
known as Island Pacific, Inc.)
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(in
thousands, except share amounts)
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,600 |
) |
|
$ |
(5,580 |
) |
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
795 |
|
|
|
828 |
|
Amortization
of debt discount
|
|
|
1,579 |
|
|
|
2,555 |
|
Gain
on sale of discontinued operations
|
|
|
(1,792 |
) |
|
|
- |
|
Provision
for allowance for doubtful accounts, net of recoveries
|
|
|
63 |
|
|
|
4 |
|
Stock-based
compensation
|
|
|
104 |
|
|
|
113 |
|
Changes
in assets and liabilities net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable and other receivables
|
|
|
131 |
|
|
|
(740 |
) |
Prepaid
expenses and other assets
|
|
|
(1,364 |
) |
|
|
(754 |
) |
Accounts
payable and accrued expenses
|
|
|
4,677 |
|
|
|
539 |
|
Deferred
revenue
|
|
|
(1,775 |
) |
|
|
367 |
|
Net
cash used by continuing operations
|
|
|
(2,182 |
) |
|
|
(1,160 |
) |
Net
cash provided by discontinued operations
|
|
|
3,799 |
|
|
|
2,696 |
|
Net
cash provided (used) by operating activities
|
|
|
1,617 |
|
|
|
1,536 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of furniture and equipment
|
|
|
(385 |
) |
|
|
(145 |
) |
Proceeds
from sale of discontinued operations
|
|
|
10,170 |
|
|
|
- |
|
Capitalized
software development costs
|
|
|
(1,724 |
) |
|
|
(1,376 |
) |
Net
cash provided (used) by investing activities
|
|
|
8,061 |
|
|
|
(1,625 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from term notes and contracts
|
|
|
- |
|
|
|
1,356 |
|
Payments
on term notes
|
|
|
(7,584 |
) |
|
|
(550 |
) |
Net
cash provided (used) by financing activities
|
|
|
(7,584 |
) |
|
|
1,286 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
- |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
2,094 |
|
|
|
791 |
|
Cash
and cash equivalents, beginning of period
|
|
|
565 |
|
|
|
542 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
2,659 |
|
|
$ |
1,333 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
701 |
|
|
$ |
1,192 |
|
Income
taxes paid
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Issued
200,000 shares of common stock and a warrant to purchase 200,000 shares of
common stock related to the termination of a product distribution
agreement
|
|
$ |
20 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
RETAIL
PRO, INC. AND SUBSIDIARIES
(Formerly
known as Island Pacific, Inc.)
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December
31, 2007
NOTE 1 -
ORGANIZATION AND BASIS OF PREPARATION
The
accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all
of the information and notes required for complete financial
statements. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash flows
at December 31, 2007 and for all the periods presented have been
made.
On
October 31, 2007 the Company announced the signing of a definitive Asset
Purchase Agreement (“Agreement”) to sell its Island Pacific Retail Management
Solutions (IPMS) business unit with the “Island Pacific” name and related
trademarks, service marks, trade names and all goodwill associated with the name
“Island Pacific”. The Agreement transaction closed on December 20,
2007. This operation is considered to be discontinued as defined
under Financial Accounting Standard No. 144 (“FAS No. 144”), “Accounting for the
Impairment or Disposal of Long-Lived Assets” and require specific accounting and
reporting for this quarter which differs from the approach used to report the
Company’s results in prior quarters. It also requires a restatement
of comparable prior periods to conform to the required
presentation.
The
Company’s financial statements reflect the accounting and disclosure
requirements of FAS No. 144 which mandates the segregation of operating results
for the current quarter and comparable prior quarters of the current year and
the balance sheet related to the operation to be sold from those related to
ongoing operations. Accordingly, the consolidated condensed
statements of income for the three and nine month periods ending December 31,
2007 and 2006 reflect this segregation as a gain or loss from discontinued
operations. The segregation of the total assets of the operation to
be sold is disclosed in the accompanying footnotes to the consolidated condensed
financial statements (see Note 13).
The
Company has evaluated the determination of its reporting segments as a result of
the changes in its organizational structure and the classification of IPMS (“the
Retail Management segment”) to discontinued operations during the third quarter
of 2008 in accordance with Financial Accounting Standards No. 131 (“FAS No.
131’), Disclosures about Segments of an Enterprise and related
Information”. The Company has determined it has two reportable
segments for continuing operations, Store Solutions and Multi-Channel
Retail.
The
financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes thereto
in our Form 10-K for the year ended March 31, 2007.
The
results of operations for the three and nine months ended December 31, 2007 and
2006 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 -
GOING CONCERN UNCERTANTITY
We
incurred a loss of $1.9 million for the three months ended December 31, 2007,
have a recent history of losses and have not been able to achieve profitability.
The recent losses have generally been due to difficulties completing
sales for new application software licenses, deferral of gross profit from
contracts in process to future periods, a change in sales mix toward lower
margin services, and debt service expenses. We will need to generate
additional revenue and reduce expenses to achieve profitability in future
periods. In that regard, we are implementing a strategic plan to integrate
our product lines and unify our processes and operations. This plan is a
continuation of the Company’s drive towards profitability.
NOTE 3 –
PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2007 and March 31, 2007 consisted of the following
(in thousands):
|
|
December
31,
|
|
|
March
31
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Computer
and office equipment and purchased software
|
|
$ |
1,357 |
|
|
$ |
3,000 |
|
Furniture
and fixtures
|
|
|
155 |
|
|
|
308 |
|
Leasehold
improvements
|
|
|
67 |
|
|
|
332 |
|
|
|
|
1,.579 |
|
|
|
3,640 |
|
Less
accumulated depreciation and amortization
|
|
|
1,276 |
|
|
|
3,333 |
|
Total
|
|
$ |
303 |
|
|
$ |
307 |
|
Depreciation
expense for the three months ended December 31, 2007 and 2006 was $55 thousand
and $74 thousand, respectively. Depreciation expense for the nine
months ended December 31, 2007 and 2006 was $158 thousand and $245 thousand,
respectively.
NOTE 4 -
GOODWILL AND OTHER INTANGIBLES
At
December 31, 2007 and March 31, 2007, goodwill and other intangibles consist of
the following (in thousands):
|
|
December
31, 2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying
|
|
Accumulated
|
|
|
|
Gross
carrying
|
|
Accumulated
|
|
|
|
|
|
amount
|
|
amortization
|
|
Net
|
|
amount
|
|
amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
13,511 |
|
|
- |
|
$ |
13,511 |
|
$ |
28,993 |
|
$ |
(6,009 |
) |
$ |
22,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
technology
|
|
|
8,921 |
|
|
(2,622 |
) |
|
6,299 |
|
|
30,818 |
|
|
(20,267 |
) |
|
10,551 |
|
Customer
relationships
|
|
|
1,836 |
|
|
(771 |
) |
|
1,065 |
|
|
1,836 |
|
|
(646 |
) |
|
1,190 |
|
Unamortized
intangible trademark
|
|
|
833 |
|
|
- |
|
|
833 |
|
|
833 |
|
|
- |
|
|
833 |
|
|
|
|
11,590 |
|
|
(3,393 |
) |
|
8,197 |
|
|
33,487 |
|
|
(20,913 |
) |
|
12,574 |
|
Total
goodwill and other intangibles
|
|
$ |
25,101 |
|
|
(3,393 |
) |
$ |
21,708 |
|
$ |
62,480 |
|
$ |
(26,922 |
) |
$ |
35,558 |
|
Software
and customer relationships are amortized on a straight-line basis over their
useful lives, seven and ten years, respectively. The goodwill and the
trademark have indefinite useful lives and are not subject to
amortization.
Amortization
expense (unaudited) for the three months and for the nine months ended December
31, 2007 and 2006 consists of the following (in thousands):
|
|
Three
Months Ended December 31,
|
|
|
Nine
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Amortization
of Capitalized Software Development
Costs
Included in Cost of Revenues
|
|
$ |
193 |
|
|
$ |
193 |
|
|
$ |
578 |
|
|
$ |
578 |
|
Amortization
of Other Intangible Assets
|
|
|
42 |
|
|
|
42 |
|
|
|
125 |
|
|
|
125 |
|
|
|
$ |
235 |
|
|
$ |
235 |
|
|
$ |
703 |
|
|
$ |
703 |
|
NOTE 5 –
DEFERRED ROYALTIES AND RELATED MAINTENANCE
On May
21, 2007, we entered into a contract for $409 thousand with Oracle USA, Inc. to
buyout the royalties that would apply to embedding the Oracle Business
Intelligence Application Package in Version 9 of our Retail Pro®
software. We also purchased a one-year support contract for $78
thousand. On May 22, 2007, we entered into a contract for $550 thousand with
Oracle USA, Inc. to buyout the royalties that would apply to the embedding of
Oracle database software in upgrades to Version 9 of our Retail Pro® software
from earlier versions. We also purchased a two-year support contract
for $209 thousand.
The
royalty buyouts will be amortized as upgrades are delivered and the support
contract will be amortized commencing with the General Release of Version 9 in
January 2008 over a forty one month period, the remaining terms of the royalty
buyout agreements.
NOTE 6 -
CONVERTIBLE DEBENTURES AND TERM NOTES
CONVERTIBLE
DEBENTURES
Convertible
debentures at December 31, 2007 and March 31, 2007 consist of the following (in
thousands):
|
|
December
31
|
|
|
|
|
|
|
(unaudited)
|
|
|
March
31
|
|
|
|
|
|
|
|
|
9%
convertible debentures, due May 2007
|
|
$ |
913 |
|
|
$ |
913 |
|
Convertible
term note, bearing interest at the prime rate plus 2%, due July 2007, net
of unamortized debt discount of $0 and $570, respectively
|
|
|
2,067 |
|
|
|
6,218 |
|
Convertible
term notes, bearing interest at the prime rate plus 1%, due June 2008, net
of unamortized debt discount of $617 and $1,626,
respectively
|
|
|
3,582 |
|
|
|
2,574 |
|
|
|
|
6,562 |
|
|
|
9,705 |
|
Less:
current maturities
|
|
|
6,562 |
|
|
|
7,185 |
|
Long-term
portion of convertible notes
|
|
$ |
- |
|
|
$ |
2,520 |
|
TERM
NOTES
Term
Notes at December 31, 2007 and March 31, 2007 consist of the following (in
thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable, bearing interest at the prime rate plus 2%, due April 30,
2007
|
|
$ |
675 |
|
|
$ |
675 |
|
Note
payable, bearing interest at the prime rate plus 2%, due June 30,
2007
|
|
|
- |
|
|
|
2,625 |
|
Non-interest
bearing Note payable, due June 30, 2007
|
|
|
- |
|
|
|
237 |
|
|
|
$ |
675 |
|
|
$ |
3,537 |
|
NOTE 7 -
DEFERRED REVENUE
Deferred
revenue as of December 31, 2007 and March 31, 2007 consists of the following (in
thousands):
|
|
December
31,
|
|
|
|
|
|
|
(unaudited)
|
|
|
March
31
|
|
|
|
|
|
|
|
|
Contracts
in Process
|
|
$ |
- |
|
|
$ |
236 |
|
Prepaid
Support Service
|
|
|
4,585 |
|
|
|
5,861 |
|
Customer
Deposits
|
|
|
365 |
|
|
|
628 |
|
|
|
|
4,950 |
|
|
|
6,725 |
|
Less:
Current Portions
|
|
|
3,452 |
|
|
|
5,599 |
|
Long-Term
Deferred Revenue
|
|
$ |
1,498 |
|
|
$ |
1,126 |
|
NOTE 8 –
SHARE-BASED COMPENSATION
Effective
April 1, 2005, we commenced accounting for stock-based compensation in
accordance with the provision of SFAS No. 123(R), “Share-Based Payment”, issued
in December 2004 as a revision of SFAS No. 123 and requiring that the cost
resulting from share based payments be recognized in the financial statements
using a fair value measurement. The share-based payments arise from
the grant of stock options from one of the Company plans, and compensation is
recorded using a closed-form option-pricing model which assumes that the option
exercises occur at the end of the contractual term and that the expected
volatility, expected dividends, and risk-free interest rates are constant over
the option’s term. We account for the cost of stock-based
compensation on a straight-line basis over the requisition service period for
the entire award.
Share
based compensation included in Selling, General and Administrative Expenses in
the three months ended December 31, 2007 and 2006 was $46 thousand and $607
thousand, respectively. Share based compensation included in Selling,
General and Administrative Expenses in the nine months ended December 31, 2007
and 2006 was $192 thousand and $834 thousand, respectively.
NOTE 9 -
EQUITY TRANSACTIONS
In the
three months ended December 31, 2007, we had the following equity
transaction:
|
·
|
On
October 15, 2007 we issued 466,667 and 100,000 shares of common stock as
director fees with a fair market value of $51,334 and $8,000
respectively.
|
NOTE 10 -
LOSS PER SHARE
Basic
loss per common share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the reporting
period. Diluted earnings per common shares ("diluted EPS") reflect
the potential dilutive effect, determined by the treasury method, of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Loss per share for the three and nine months
ended December 31, 2007 and 2006 is calculated as follows (in
thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders from continuing
operations
|
|
$ |
(3,599 |
) |
$ |
(3,391 |
) |
$ |
(8,544 |
) |
$ |
(
7,771 |
) |
Net
gain available to common stockholders from discontinued
operations
|
|
$ |
1,792 |
|
$ |
1,535 |
|
$ |
3,944 |
|
$ |
2,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares
|
|
|
60,439 |
|
|
62,267 |
|
|
60,052 |
|
|
66,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from continuing operations
|
|
$ |
(0.06 |
) |
$ |
(0.06 |
) |
$ |
(0.15 |
)
|
$ |
(0.12 |
) |
Basic
and diluted gain per share from discontinued operations
|
|
$ |
0.03 |
|
$ |
0.03 |
|
$ |
0.07 |
|
$ |
0.04 |
|
The
following potential common shares have been excluded from the computation of
diluted net loss per share at December 31, 2007 and 2006, because the effect
would have been anti-dilutive:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Outstanding
options under our stock option plans
|
|
|
11,756,697 |
|
|
|
9,538,302 |
|
Outstanding
options granted outside our stock option plans
|
|
|
28,910,295 |
|
|
|
28,540,000 |
|
Warrants
issued in conjunction with private placements
|
|
|
- |
|
|
|
- |
|
Warrants
issued for services rendered
|
|
|
1,009,565 |
|
|
|
1,049,565 |
|
Warrants
issued in conjunction with convertible debentures
|
|
|
16,092,048 |
|
|
|
17,795,098 |
|
Series
A Convertible Preferred Stock
|
|
|
- |
|
|
|
- |
|
Convertible
debt
|
|
|
35,896,010 |
|
|
|
59,501,075 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
93,654,665 |
|
|
|
116,424,040 |
|
NOTE 11 -
BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a
leading provider of software solutions and services that have been developed
specifically to meet the needs of the retail industry. We provide
high value innovative solutions that help retailers understand, create, manage
and fulfill consumer demand. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We have
structured our operations into two strategic business units that are separate
reporting structures. The business units are , store solutions and
multi-channel retail solutions. Our operations are conducted
principally in the United States and the United Kingdom. In addition,
we manage long-lived assets by geographic region. The business units
are as follows:
|
·
|
Store
Solutions -
Through our acquisition of Retail technologies,
Inc. (“RTI”), we focused our Store Solutions offerings on
“Retail Pro®,” which provides a total solution for small to mid-tier
retailers worldwide. Retail Pro® is currently used by
approximately 10,000 businesses in over 45,000 stores in 73
countries. The product is translated into eighteen languages making
it one of the few quality choices for the global retailer. At
its core, Retail Pro® is a high performance, 32-bit Windows application
offering point-of-sale, inventory control and customer relations
management. Running on WindowsNT, Windows2000, Windows XP
Professional and Windows.Net platforms, Retail Pro® combines a fully
user-definable graphical interface with support for a variety of input
devices (from keyboard to touch screen). Its Retail Business
Analytics module includes an embedded Oracle(r) 9i database. Retail Pro®
is fast and easy to implement. The software has been developed
to be very flexible and adaptable to the way a retailer runs its
business.
|
|
·
|
Multi-channel
Retail Solutions (“Multi-channel Retail”) – Our Multi-Channel
Retail application is designed to specifically address direct commerce
business processes, which primarily relate to interactions with the
end-user. This application was originally designed by Page
Digital to manage its own former direct commerce operation, with attention
to functionality, usability and scalability. Its components
include applications for customer relations management, order management,
call centers, fulfillment, data mining and financial
management. Specific activities like partial ship orders,
payments with multiple tenders, back order notification, returns
processing and continuum marketing represent just a few of the more than
1,000 parameterized direct commerce activities that have been built into
“Synaro”™, our Multi-Channel Solution and its
applications. These components and the interfacing technology
are available to customers, systems integrators and independent software
developers who may modify them to meet their specific
needs.
|
A summary
of the net sales and operating income (loss), excluding depreciation and
amortization expense, and identifiable assets attributable to each of these
business units from continuing operations are as follows (in
thousands):
|
|
Three
Months Ended December 31, ,
|
|
Nine Months
Ended December 31,,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
Store
Solutions
|
|
$ |
3,121 |
|
$ |
2,808 |
|
$ |
9,282 |
|
$ |
9,043 |
|
Multi-channel
Retail
|
|
|
360 |
|
|
652 |
|
|
1,231 |
|
|
1,656 |
|
Consolidated
net sales
|
|
$ |
3,481 |
|
$ |
3,460 |
|
$ |
10,513 |
|
$ |
10,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
Solutions
|
|
$ |
(597 |
) |
$ |
113 |
|
$ |
(887 |
)
|
$ |
1,761 |
|
Multi-channel
Retail
|
|
|
(205 |
) |
|
58 |
|
|
(459 |
)
|
|
(49 |
) |
Other
(see below)
|
|
|
(1,636 |
) |
|
(1,141 |
) |
|
(3,580 |
)
|
|
(3,243 |
) |
Consolidated
operating income (loss)
|
|
$ |
(2,438 |
) |
$ |
(970 |
) |
$ |
(4,926 |
)
|
$ |
(1,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
(79 |
) |
$ |
(83 |
) |
$ |
(225 |
)
|
$ |
(251 |
) |
Administrative
costs and other non-allocated expenses
|
|
|
(1,557 |
) |
|
(1,058 |
) |
|
(3,355 |
)
|
|
(2,992 |
) |
Consolidated
other operating loss
|
|
$ |
(1,636 |
) |
$ |
(1,141 |
) |
$ |
(3,580 |
)
|
$ |
(3,243 |
) |
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
Retail
Management
|
|
$ |
- |
|
|
$ |
16,519 |
|
Store
Solutions
|
|
|
28,541 |
|
|
|
19,524 |
|
Multi-channel
Retail
|
|
|
3,923 |
|
|
|
3,962 |
|
Consolidated
identifiable assets
|
|
$ |
32,464 |
|
|
$ |
40,005 |
|
|
|
|
|
|
|
|
|
|
Goodwill,
Net of amortization
|
|
|
|
|
|
|
|
|
Retail
management
|
|
$ |
- |
|
|
$ |
9,474 |
|
Store
Solutions
|
|
|
10,489 |
|
|
|
10,488 |
|
Multi-channel
Retail
|
|
|
3,022 |
|
|
|
3,022 |
|
Consolidated
goodwill
|
|
$ |
13,511 |
|
|
$ |
22,984 |
|
Operating
income (loss) in Store Solutions and Multi-channel Retail includes direct
expenses for software licenses, maintenance services, programming and consulting
services, sales and marketing expenses, product development expenses, and direct
general, administrative and depreciation expenses. The "Other"
caption includes depreciation, amortization of intangible assets, non-allocated
costs and other expenses that are not directly identified with a particular
business unit and which we do not consider in evaluating the operating income of
the business unit.
We
currently operate in the United States, United Kingdom and other international
areas. The following is a summary of local operations by geographic
area (in thousands):
|
|
Three
Months Ended December 31,
|
|
Nine
Months Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
2,375 |
|
$ |
2,320 |
|
$ |
6,886 |
|
$ |
7,067 |
|
United
Kingdom
|
|
|
66 |
|
|
52 |
|
|
333 |
|
|
136 |
|
All
Other International
|
|
|
1,040 |
|
|
1,088 |
|
|
3,294 |
|
|
3,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
3,481 |
|
$ |
3,460 |
|
$ |
10,513 |
|
$ |
10,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
Long-lived
assets:
|
|
|
|
|
|
|
United
States
|
|
$ |
22,292 |
|
|
$ |
36,175 |
|
United
Kingdom
|
|
|
- |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Total
long-lived assets
|
|
$ |
22,292 |
|
|
$ |
36,180 |
|
NOTE 12 -
COMMITMENTS AND CONTINGENCIES
RTI was
named as a cross-defendant in an action by General Electric Capital Corporation
as plaintiff ("GE Capital"), against San Francisco City Stores LLC, dated May
10, 2004. The cross-complaint filed on behalf of San Francisco City
Stores names GE Capital, Big Hairy Dog Information Systems, and RTI as
cross-defendants, claiming breach of warranty and unfair competition (against
RTI), and makes various other claims against GE Capital and Big Hairy Dog
Information Systems. The claim is for approximately
$83,000. We believe the claims made against RTI are without merit and
we intend to vigorously defend them.
Certain
of our standard software license agreements contain a limited infringement
indemnity clause under which we agree to indemnify and hold harmless our
customers and business partners against certain liability and damages arising
from claims of various copyright or other intellectual property infringement by
our products. These terms constitute a form of guarantee that is
subject to the disclosure requirements, but not the initial recognition or
measurement provisions of Financial Accounting Standards Board issued FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of
Others”. We have never lost an infringement claim and our cost to
defend such lawsuits has been insignificant.
Since
November 2005, certain of our Retail Pro® software customers had been contacted
by Acacia Technologies Group (“Acacia”) regarding alleged infringement of U.S.
Patent 4,707,592 (the “592 Patent”) and are requesting indemnification for any
infringement claim regarding the `592 Patent which expired in October
2005. We retained patent counsel and, based on his advice, have
notified customers in question that it is our position that there is no merit to
any potential claim that Retail Pro® software infringes the
patent. In direct discussions between our counsel and Acacia, no
information was provided indicating that Retail Pro® software infringes the`592
Patent. Acacia had alleged infringement against a number of retailers
including a small number of Retail Pro® software users. We are not
named in the lawsuit and, although some customers have indicated that they may
seek indemnification, no actual lawsuits have been filed against
us.
On May
25, 2005, the United States Securities and Exchange Commission (“SEC”) notified
us that it had begun an informal inquiry relating to the Company. We
cooperated completely with the SEC’s informal inquiry. On July 20,
2005, the SEC informed us that it had issued a formal order of investigation in
this matter. In connection with the investigation, the SEC is seeking
information regarding our, and our subsidiaries, financial condition, results of
operations, business, accounting policies and procedures, internal controls,
issuances of common stock and stock options, sales of common stock and option
exercises by insiders, employees and consultants as well as our internal revenue
recognition investigation relating to the timing of revenue recognition for
certain transactions during the fiscal years ended March 31, 2003, 2004 and
2005. The scope, focus and subject matter of the SEC investigation
may change from time to time and we may be unaware of matters under
consideration by the SEC. We are cooperating with the SEC in its
investigation.
On
January 10, 2008, the Company received a "Wells Letter" from the staff of the
SEC. The Company has been informed that its Chief Executive Officer, Mr. Barry
Schechter, also received a Wells Letter. The Wells Letters stated the staff of
the SEC is considering recommending the SEC bring civil injunctive actions
against the Company and Mr. Schechter for alleged violations of the federal
securities laws. Under the process established by the SEC, the recipients have
an opportunity to respond before any action is brought against them. Discussions
are ongoing between the staff and the recipients' counsel with respect to the
alleged violations and possible resolution of the matter. There is no assurance
that a resolution can be reached, or that the ultimate impact will not be
material.
Except as
set forth above, we are not involved in any material legal proceedings, other
than ordinary routine litigation proceedings incidental to our business, none of
which are expected to have a material adverse effect on our financial position
or results of operations. However, litigation is subject to inherent
uncertainties, and an adverse result in existing or other matters may arise from
time to time which may harm our business.
NOTE 13 –
ASSET SALE
On
December 21, 2007, pursuant to the terms of an Asset Purchase
Agreement effective October 31, 2007 (the “Agreement”), by and between the
Company and 3Q Holdings and Affiliates (“3Q”), Retail Pro assigned and sold to
3Q the Island Pacific Merchandising Systems (the “Division”) assets which
included all rights, title and interests worldwide of Retail Pro in and to (i)
the Division Products, (ii) the Assumed Contracts, (iii) the Division Material,
(iv) all Division Intellectual Property rights, (v) all claims of the
Division against third parties related to the purchased assets, whether choate
or inchoate, known or unknown, contingent or non-contingent, (vi) all data and
information that is collected from, or on behalf of customers of the Division
who are parties to the Assumed Contracts (the “Customer Base”), (vii) all other
tangible or intangible assets of the Division used in the business and necessary
for the operation of the Product except for cash for the aggregate purchase
price of $16.0 million. As a result of the sale, the Company realized
a gain of approximately $1.8 million due primarily to cash received and the
immediate recognition of previously un-recognized deferred revenue.
The
Company was not reasonably certain that 3Q would be able to secure the financing
necessary to close the transaction. In accordance with Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Asset,” once the 3Q financing was more probable than not,
the Company classified the identifiable assets and liabilities of the disposal
group as held for sale.
The
assets and liabilities included as part of the disposal group are summarized
below as follows:
|
|
December
21, 2007
|
|
|
March
31, 2007
|
|
Current
assets
|
|
$ |
537 |
|
|
$ |
1,038 |
|
Fixed
assets
|
|
|
239 |
|
|
|
82 |
|
Intangible
assets
|
|
|
13,024 |
|
|
|
14,873 |
|
Current
portion of deferred revenue
|
|
|
(793 |
) |
|
|
(2,523 |
) |
Total
carrying value of the disposal group
|
|
$ |
13,007 |
|
|
$ |
13,470 |
|
NOTE 14 -
RELATED-PARTY TRANSACTIONS
In
connection with the Page Digital acquisition, we assumed a three-party lease
agreement for our Colorado offices between CAH Investments, LLC ("CAH"), wholly
owned by the spouse of one of our former executive officers, Larry Page, and
Southfield Crestone, LLC, whereby Page Digital agreed to lease offices for ten
years expiring on December 31, 2011. CAH and Southfield Crestone LLC
are equal owners of the leased property. Rent expense related to this
lease is $21 thousand and $60 thousand for the three months ended December 31,
2007 and 2006, respectively, and $64 thousand and $148 thousand for the nine
months ended December 31,, 2007 and 2006, respectively. A security
deposit of $170,000 relating to this lease is included in other long-term assets
at December 31, 2007 and March 31, 2007.
NOTE 15 -
SUBSEQUENT EVENTS
Securities
Purchase Agreement and Secured Term Note
On March
3, 2008, effective February 29, 2008, Retail Pro, Inc. (the "Company") entered
into a Securities Purchase Agreement with Valens Offshore SPVII, Corp. c/o
Laurus Master Fund, Ltd. ("Laurus") for the sale of:
|
(a)
|
a
Secured Term Note (the "Note") in the principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000);
and
|
|
(b)
|
a
warrant to acquire an aggregate of 15,000,000 shares of the Company's
common stock for One Cent ($0.01) per share (the
"Warrants").
|
The Note
is due on February 29, 2009 and bears interest at the "prime rate" plus 2%,
provided that in no event shall the Contract Rate (as defined in the Note) be
less than 9.5%. The Company may prepay the Note at any time, in whole or in
part, without penalty or premium. The Note provides for mandatory prepayment as
the Company receives payment(s) pursuant to that certain Vendor Loan Agreement
dated as of December 21, 2007 by and among the Company, 3Q Holdings Limited,
Island Pacific (UK) Limited and Applied Retail Solutions, Inc. (the
"Purchasers") which, among other things, sets forth the certain agreements
relating to the Company's financing of $3,000,000 of the purchase price for
assets of the Company sold to 3Q Holdings Limited.
The
Warrants are immediately exercisable and have ten (10) year terms. The exercise
price of the Warrants adjusts proportionately in the event of any stock split,
combination, dividend or reclassification. The Note and the
Warrants
were issued without registration pursuant to the exemption provided under
Section 4(2) of the Securities Act of 1933, as amended, and Regulation-D
promulgated thereunder.
The
Company's obligations under the Note are secured by a continuing security
interest in all of the Company's assets in favor of Laurus. The Company's
obligations are also guaranteed by its subsidiaries. Laurus' security interest
is governed by the Master Security Agreement and Stock Pledge Agreement that the
Company executed in connection with the sale of the Note and the
Warrants.
Amendment
of Existing Notes
In
connection with the sale of the Note and the Warrants, the Company entered into
an Omnibus Amendment and Waiver with Laurus pursuant to which:
|
(a)
|
the
principal balance of the Amended and Restated Secured Convertible Term
Note issued to Laurus on July 12, 2004 (the "July 2004 Note") was
acknowledged to be an aggregate outstanding principal amount of
$2,066,866.48;
|
|
(b)
|
the
definition of Maturity date set forth in the July 2004 Term Note was
amended and extended to January 31,
2011;
|
|
(c)
|
the
"fixed conversion price" under the July 2004 Note was reset to $0.08 per
share for the first $688,955 converted thereunder, and $2.00
thereafter;
|
|
(d)
|
the
principal balance of the Secured Term Convertible Note issued to Laurus on
June 15, 2005 (the "June 2005 Note") was acknowledged to be an aggregate
outstanding principal amount of
$3,200,000;
|
|
(e)
|
the
definition of Maturity date set forth in the June 2005 Term
Note was amended and extended to January 31,
2011;
|
|
(f)
|
the
"fixed conversion price" under the June 2005 Note was reset to $0.08 per
share for the first $1,066,666 converted thereunder, and $2.00
thereafter.
|
The
Omnibus Amendment and Waiver also provided an acknowledgement that the company
had caused occurrences of default with three notes and accordingly acknowledged
default payments in the amount of $755,626. The entire amount of the
penalty has been recognized as of December 31, 2007.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 AND THE COMPANY INTENDS THAT CERTAIN MATTERS DISCUSSED IN THIS REPORT ARE
"FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY
THE CONTEXT OF THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("IPI,"
"WE" OR "US") "BELIEVES," "ANTICIPATES," "EXPECTS," "FORECASTS," "ESTIMATES" OR
OTHER WORDS WITH SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS THAT
DESCRIBE FUTURE PLANS, OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE ALSO
DEEMED FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS
REPORT. CERTAIN OF SUCH RISKS AND UNCERTAINTIES ARE DESCRIBED IN
CLOSE PROXIMITY TO SUCH STATEMENTS AND ELSEWHERE IN THIS REPORT INCLUDING ITEM
2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." STOCKHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE
URGED TO CONSIDER THESE FACTORS IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS OR
CONSTRUE SUCH STATEMENTS TO BE A REPRESENTATION BY US THAT OUR OBJECTIVES OR
PLANS WILL BE ACHIEVED. THE FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS REPORT ARE MADE ONLY AS OF THE DATE OF THIS REPORT, AND WE UNDERTAKE NO
OBLIGATION TO PUBLICLY UPDATE SUCH FORWARD-LOOKING STATEMENTS TO REFLECT
SUBSEQUENT EVENTS OR CIRCUMSTANCES.
THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-Q. READERS ARE ALSO URGED TO
CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT
TO ADVISE INTERESTED PARTIES OF THE FACTORS WHICH AFFECT OUR BUSINESS, INCLUDING
WITHOUT LIMITATION THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR
ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2007, AND THE
DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K, AS WELL AS OTHER
REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
We are a
provider of software solutions and services to the retail industry, providing
solutions that help retailers understand, create, manage and fulfill consumer
demand. Due to the scalability of our Store Solutions software, we
are able to meet the needs of the broad spectrum of retail customers from small
businesses to large enterprise applications. We derive the majority
of our revenues from three sources: the initial sale of application software
licenses, or license revenues, professional services and support, and
maintenance. Application software license fees are dependent upon the
sales volume of our customers, the number of users of the application(s), and/or
the number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds
additional users and/or adds additional locations, we charge additional license
fees. Professional services relate to implementation of our software,
training of customer personnel and modification or customization
work. Support, maintenance and software updates are a source of
recurring revenues and are generally based on a percentage of the software
license revenues and are charged on an annual basis pursuant to renewable
maintenance contracts. We typically charge for professional services
including consulting, implementation and project management services on an
hourly basis.
As the
vast majority of our revenues are derived from the retail industry, we are
heavily dependent on the financial strength of retailers and their capital
budgets. Deterioration in the health of retailers, a reduction in
their capital budget or a decision to delay the purchase of new systems have a
direct impact on our business. Our large enterprise sales cycles are
long, generally three to twelve months, and our ability to close a pipeline of
potential transaction is very unpredictable. As such, management
believes that license revenue and growth in license revenue are the best
indicator of the Company's business as they signify either new customers or an
expansion of licenses of existing customers.
In recent
periods, revenues have continued to grow, we have rebuilt our staffing
infrastructure, released version 9 of the Retail Pro point of sale software with
significant enhancements thereto, reduced operating
losses, and developed plans for achieving profitability. Improvement
in our operations has been derived from:
|
·
|
Appointment
of a new management team in the current fiscal
year.
|
|
·
|
Sold
the Retail Management division
|
|
·
|
Significantly
reduced debt
|
|
·
|
New
focus on R & D for core products and termination of unprofitable
partner ventures;
|
|
·
|
Introduction
of new products to the market;
|
|
·
|
Opening
of a Europe, Middle East and Africa division through our UK office to
better serve the business
|
Partner’s
in these regions marketing Retail Pro;
|
·
|
Opening
an Asia Pacific office in Sydney, Australia and Beijing China to serve the
Greater Chinese Geography,
|
and
develop a dedicated team to better serve Latin America.
We
believe that these actions will position us to achieve revenue growth and
profitability.
THREE
MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2006
REVENUES
License
revenue for our Store Solutions division was flat for the three months ended
December 31, 2007 compared to the three months ended December 31, 2006,
primarily due to anticipation of the release of Version 9 of our Retail Pro®
software. Professional services revenue of our Store Solutions
division increased approximately $0.2 million due to the delay of license
purchases. Payment processing services and technical support services
revenue increased approximately $0.1 million for the three months ended December
31, 2007 compared to the three months ended December 31, 2006, primarily due an
increase in support renewals..
License
revenues of our Multi-Channel division decreased by approximately $0.3 million
for the three months ended December 31, 2007 compared to the three months ended
December 31, 2006. The revenue for professional services, payment
processing services and technical support was flat for the three months ended
December 31, 2007 compared to the three months ended December 31,
2006.
These
changes in Product and Services revenues resulted in net revenue being flat in
the amount of $3.5 million for the three months ended December 31, 2007 compared
to the three months ended December 31, 2006.
The three
months ended December 31, 2007 continues the trend of the fiscal year ended
March 31, 2007. The slowdown in the U.S. and world economies caused
the retail industry to be more cautious with its investment in information
systems which resulted in a lack of growth in sales and in extended sales
cycles. In addition, our financial condition may have interfered with
our ability to sell new large enterprise application software licenses, as
implementation of large enterprise applications generally requires extensive
future services and support, and some potential customers have expressed concern
about our financial ability to provide these ongoing services. The
effect of these conditions has carried over to the current quarter.
COST OF
REVENUES/GROSS PROFIT
The cost
of revenues increased approximately 9% or $0.1 million to $1.2 million for the
three months ended December 31, 2007 compared to cost of revenue of $1.1 million
for the three months ended December 31, 2006. The increase was due to
the use of third parties to provide the necessary services. Total
gross profit in was flat for the three months ended December 31, 2007 compared
to the three months ended December 31, 2006.
APPLICATION
DEVELOPMENT EXPENSE
Application
development expense increased by $0.2 million, or approximately 34%, to $0.8
million in the three months ended December 31, 2007 compared to the three months
ended December 31, 2006. This increase resulted from our continued
effort to upgrade our existing software line while we continued to develop new
software technologies.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization was $0.1 million for the three months ended December 31, 2007
and the three months ended December 31, 2006.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
SG&A
expenses increased by $1.2 million to $3.8 million for the three months ended
December 31, 2007 compared to the three months ended December 31,
2006. The increase is attributable to $0.4 million for bonus
associated with the sale of the Island Pacific Retail Management Solutions
Division and $0.6 million for salaries and wages of approximately 25 incremental
staff over the same three month period ended December 31, 2006.
OPERATING
INCOME
The loss
from continuing operations, which included depreciation and amortization
expense, increased $0.3 million for the three months ended December 31, 2007
compared to the three months ended December 31, 2006. The increase in the loss
from continuing operations was due primarily to the increase in Selling,
General, and Administrative expense.
INTEREST
EXPENSE
Interest
expense increased by $0.4 million in the three months ended December 31, 2007
compared to the three months ended December 31, 2006, as a result of $0.4
million of default interest on the Laurus Convertible and Term
Notes.
NINE
MONTHS ENDED DECEMBER 31, 2007 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2006
REVENUES
Revenue
for the nine months ended December 31, 2007 compared to the to the nine months
ended December 31, 2006, decreased by $0.2 million from $10.7 million to $10.5
million. The Store Solutions product revenue decreased $0.3 million for the
period as a result of a delay in the release of Version 9 of the Retail Pro®
software. The Multi-Channel product revenue decreased by $0.2 million
for the period as a result of less professional service business. The
decrease in the segments product revenue of $0.5 million for the nine months
ended December 31, 2007 compared to the to the nine months ended December 31,
2006 was partially offset by a $0.3 million increase in support revenue for the
period.
Revenues
from existing customers are increasing because of new product sales as well as
software subscription renewals, however, new customer sales have been hindered
by market factors and the delay in releasing Version 9 of the Retail Pro®
software. The slowdown in the U.S. and world economies combined with
the fear of future terrorist attacks and the ongoing hostilities in the world
caused the retail industry to be more cautious with their investment in
information systems and deliberately evaluating solutions, which resulted in
decreases in sales and in extended sales cycles. In addition, our
financial condition may have interfered with our ability to sell new application
software licenses, as implementation of our applications generally requires
extensive future services and support, and some potential customers have
expressed concern about our financial ability to provide these ongoing
services. The effect of these conditions has carried over to the
current quarter.
COST OF
REVENUES/GROSS PROFIT
Total
cost of revenue were flat for the nine months ended December 31, 2007, compared
to the nine months ended December 31, 2006. As a result of the decrease in
revenue, the total gross profit was approximately $0.2 million less for the nine
months ended December 31, 2007 compared to the nine months ended December 31,
2006.
APPLICATION
DEVELOPMENT EXPENSE
Application
development expense increased by $1.1 million for the nine months ended December
31, 2007 compared to the nine months ended December 31, 2006 from $1.6 million
to $2.7 million, an increase of 69%. This increase resulted from our continued
effort to upgrade our existing software line while we continue to develop new
software technologies.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization expense was flat for the nine months ended December 31, 2007
compared to the nine months ended December 21, 2006.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
SG&A
expenses increased approximately $2.0 million, (29%) to $9.3 million for the
nine months ended December 31, 2007, compared to the nine months ended December
31, 2006. The increase in expense is due primarily to an increase in
development engineers and marketing personnel to expedite the beta testing of
Version 9 of the Retail Pro® software and prepare for an aggressive marketing
effort when the product is ready for general release.
OPERATING
LOSS
The
operating loss for the nine months ended December 31, 2007 was $4.9million
compared to an operating loss of $1.5 million for the nine months ended December
31, 2006. The $3.4 million increase in operating loss is primarily
due to the addition of development and marketing staff .
INTEREST
EXPENSE
Interest
expense increased $0.8 million to $2.0 million for the nine months ended
December 31, 2007 compared to the nine months ended December 31,
2006. The increase in interest expense was a result of
approximately $0.8 million of default interest on the Convertible and Term
Notes.
LIQUIDITY
AND CAPITAL RESOURCES
CASH
FLOWS
During
the nine months ended December 31, 2007, we financed our operations using cash
on hand, cash provided by operations, and proceeds from the sale of the IPMS
Division. At December 31, 2007 and March 31, 2007, we had cash
of $2.7 million and $0.6 million, respectively.
Continuing
operations activity used cash in the amount of $2.1 million in the nine months
ended December 31 2007 and cash of $0.8 million in the nine months ended
December 31, 2006. Cash provided by continuing operations activity in
the nine months ended December 31, 2007 results from $4.6 million net loss which
includes non-cash depreciation and amortization of $0.8 million, amortization of
debt discount of $1.6 million, and stock based compensation of $0.1
million. Similarly, in the nine months ended December 31, 2006, the
net loss of $5.4 million included non-cash depreciation and amortization of $0.8
million and amortization of debt discount of $2.3 million and stock based
compensation expense in the amount of $0.3 million. The cash provided
by discontinued operations was $3.8 million for the period ended December 31,
2007 and $1.8 million for the period ended December 31,
2006. The cash flow provided by operating activities the nine
months ended December 31, 2007 is primarily due to an increase in accounts
payable and accrued expense. The cash flow provided by operating activities the
nine months ended December 31, 2006 is primarily due to an increase in accounts
payable, accrued expense and deferred revenue.
Investing
activities provided cash of $8.1 million for the nine months ended December 31,
2007 and used cash of $1.6 million for the nine months ended December 31,
2006. The cash provided by investing activities for the nine months
ended December 31, 2007 was a result of the net proceeds from the sale of the
discontinued operation in the amount of $10.2 million offset by capitalized
development costs in the amount of $1.7 million and the purchase of fixed assets
in the amount of $0.4 million. The cash used by investing activities
for the nine months ended December 31, 2006 was primarily due to capitalized
software costs in the amount of $1.5 million.
Financing
activities used cash in the amount of $7.6 million for the nine months ended
December 31, 2007 and provided cash in the amount of $1.3 million for the nine
months ended December 31, 2006. Cash used by financing activities for the nine
months ended December 31, 2007 was to reduce the principal on debt and other
long term obligations. Cash provided by financing activities for the
nine months ended December 31, 2007 was proceeds from term notes and contracts
offset by payments on term notes.
We
believe that our cash, cash equivalents and funds generated from operations will
provide adequate liquidity to meet our normal operating requirements for at
least the next twelve months. Our future capital requirements depend
on many factors, including our application development, sales and marketing
activities. In addition, we have incurred losses for the last three
fiscal years and we had a negative working capital at December 31, 2007. In the
long-term, we anticipate that cash from operations will be sufficient to provide
liquidity for our normal operating requirements. However, our growth
may depend on additional financing, and we do not know whether additional
financing will be available when needed, or available on terms acceptable to
us. We may raise capital through public or private equity or debt
financings. If we are unable to raise the needed funds, we may be
forced to curtail some or all of our activities and we may not be able to
grow.
INDEBTEDNESS
OMICRON/MIDSUMMER
On March
15, 2004, we sold Omicron Master Trust ("Omicron") and Midsummer Investment,
Ltd. ("Midsummer") convertible debentures (the "March 2004 Debentures") for an
aggregate price of $3.0 million pursuant to a securities purchase agreement (the
"March 2004 Debenture Purchase Agreement"). With a portion of the
proceeds from the sale of the Laurus 2004 Convertible Note, we paid Omicron
$1.75 million, the full amount due under its March 2004 Debenture, plus $0.2
million in accrued interest, liquidated damages pursuant to the
Omicron/Midsummer Registration Rights Agreement, and prepayment
penalties. The March 2004 Debentures due to Midsummer bear interest
at a rate of 9% per annum, and provide for interest only payments on a quarterly
basis, payable, at our option, in cash or shares of our common
stock. The March 2004 Debentures initially matured on May 15, 2006,
but the maturity date was extended to April 30, 2007 pursuant to the Amendment
and Waiver between us and Midsummer dated April 23, 2007.
We
entered into a registration rights agreement with Omicron and Midsummer dated
March 15, 2004 (the “Omicron/Midsummer Registration Rights Agreement”), pursuant
to which we were required to file a registration statement respecting the common
stock issuable upon the conversion of the March 2004 Debentures and exercise of
the warrants within 30 days after March 15, 2004, and to use best efforts to
have the registration statement declared effective at the earliest date but in
no event later than 90 days after March 15, 2004 (or 120 days in the event of
full review). The Omicron/Midsummer Registration Rights Agreement
provided that if we failed to file a registration statement within such 30 day
period or have it declared effective within such 90 day period (or 120 day
period in the event of a full review), we were obligated to pay liquidated
damages to Omicron and Midsummer equal to 2% per month of each of their initial
subscription amounts plus the value of any outstanding warrants. The
filing deadline was extended to October 31, 2007 pursuant to the March/April
2007 Amendments, and the initial effectiveness date was amended to 135 days
after the filing date.
The
company is presently finalizing an agreement to further extend the filing
deadline and initial effectiveness date.
The
outstanding balance of Midsummer Debenture, including accrued interest, is $1.0
million.
TOMCZAK/BOONE
In
connection with the RTI acquisition in June 2004, we issued promissory notes to
RTI's two principals, Michael Tomczak and Jeffrey Boone, totaling $2.6 million
("Officers Notes"). The Officers Notes were due on June 1, 2006 and
payable in monthly installments in aggregate of $20,000 from June 1, 2004
through May 1, 2005, increasing to $0.2 million from June 1,
2005. The Officers Notes earn interest at a rate of 6.5% per
annum. The balance of the Officers Notes is $2.5 million at December
31, 2007.
On April
18, 2005, in conjunction with the issuance of a secured term note to
Multi-Channel, pursuant to a Subordinated Seller Note Subordination Agreement
(“Subordination Agreement”), the Officers Notes were subordinated to the debts
owed by us to Multi-Channel and Laurus (“Senior Debts”), prohibiting any payment
of principal or interest on the Officers Notes until the Senior Debts have been
paid in full.
LAURUS
On July
12, 2004, we sold and issued a secured convertible term note (the "Laurus Note")
to Laurus Master Fund, Ltd. ("Laurus") for gross proceeds of $7.0 million
pursuant to a Securities Purchase Agreement. In addition, we issued Laurus a
warrant to purchase up to 3,750,000 shares of our common stock at a price of
$0.71 per share (the "Laurus Warrant").
The
Laurus 2004 Convertible Note initially matured on September 1, 2004, however,
the maturity date was automatically extended to July 12, 2007 (the “Maturity
Date”) upon our stockholders approving an increase in our authorized common
stock from 100 to 250 million shares and our filing an amendment to our
certificate of incorporation to effect such change on August 27,
2004. The Laurus 2004 Convertible Note accrues interest at a rate per
annum equal to the “prime rate” published in The Wall Street Journal from time
to time, plus two percent. Interest under the Laurus 2004
Convertible Note is payable monthly in arrears commencing August 1,
2004. The Interest Rate is recalculated with each change in the prime
rate and is subject to adjustment based on the then-current price of our common
stock. The initial conversion price under the Laurus 2004 Convertible
Note was $0.56 per share, subject to adjustment upon our issuance of securities
at a price below the fixed conversion price, a stock split or combination,
declaration of a dividend on our common stock or reclassification of our common
stock. We have the option to redeem the Laurus 2004 Convertible Note
by paying Laurus 125% of the principal amount due under the Laurus 2004
Convertible Note together with all accrued and unpaid interest. Our
obligations under the Laurus 2004 Convertible Note are secured by all of our
assets and guaranteed by our subsidiaries, pursuant to the Laurus Security
Instruments.
The
balance of the Laurus 2004 Convertible Note, including accrued interest, is $2.1
million at December 31 2007.
JUNE 2005
CONVERTIBLE NOTES
On June
15, 2005, we sold and issued secured convertible term notes to Laurus for gross
proceeds of $3.2 million (the “Laurus June 2005 Convertible Note”) and to
Midsummer for gross proceeds of $1.0 million (the “Midsummer June 2005
Convertible Note”) (together the “June 2005 Convertible Notes”) pursuant to
Securities Purchase Agreements. We also issued Laurus and Midsummer
warrants to purchase up to 4,444,444 and 1,388,889 shares of our common stock,
respectively, at a price of $0.23 per share (the “June 2005 Warrants”) and
options to purchase up to 17,142,857 and 5,357,143 shares of our common stock,
respectively, at the price of $0.01 per share (the “June 2005
Options”).
The June
2005 Convertible Notes mature on June 15, 2008 and accrue interest at a rate per
annum equal to the “prime rate” published in The Wall Street Journal from time
to time, plus one percent, calculated each day that the prime rate changes,
payable monthly in arrears commencing on July 1, 2005. In addition to
accrued interest, commencing on October 3, 2005, the June 2005 Convertible Notes
require monthly principal payments to Laurus and Midsummer of $106,667 and
$40,000, respectively. The principal payments have been deferred
pursuant to November 2005, March 2006, October/November 2006, and March/April
2007 Amendments below. The June 2005 Convertible Notes are
convertible to common stock at $0.20 per share, subject to adjustment upon our
issuance of securities at a price below the fixed conversion price, a stock
split or combination, declaration of a dividend on our common stock or
reclassification of our common stock. Our obligations under the June
2005 Convertible Notes are secured by all of our assets and guaranteed by our
subsidiaries pursuant, with respect to Laurus, to the Master Security Agreement
and Subsidiary Guaranty in favor of Laurus dated July 12, 2004 (the “Laurus
Security Instruments”) and, with respect to Midsummer, to the Master Security
Agreement and the Subsidiary Guaranty in favor of Midsummer dated June 15, 2005
(the “Midsummer Security Instruments”).
The
balance of the June 2005 Convertible Notes, including accrued interest, is $4.3
million at December 31, 2007.
NOVEMBER
2005 TERM NOTES
On
November 16, 2005, we sold and issued secured term notes to Laurus for gross
proceeds of $637,500 (the “Laurus November 2005 Term Note”) and to Midsummer for
gross proceeds of $212,500 (the “Midsummer November 2005 Term Note”) (together
the “November 2005 Term Notes”) pursuant to securities purchase
agreements. In addition, we issued Laurus and Midsummer options to
purchase up to 1,125,000 and 375,000 shares of our common stock, respectively at
the price of $0.01 per share (the “November 2005 Options).
The
November 2005 Term Notes initially matured on February 1, 2006 but the maturity
dates were extended to June 30, 2007 pursuant to the March/April 2007
Amendments. The November 2005 Term Notes accrue interest at a rate
per annum equal to the “prime rate” published in The Wall Street Journal from
time to time, plus two percent, calculated each day that the prime rate changes,
payable monthly in arrears commencing on December 1, 2005. Our
obligations under the November 2005 Term Notes are secured by all of our assets
and guaranteed by our subsidiaries pursuant to the Laurus Security Instruments
and the Midsummer Security Instruments.
The
balance of the November 2005 Term Notes, including accrued interest, is $0.7
million at December 31, 2007.
CONTRACTUAL
OBLIGATIONS
The
following table summarizes our contractual obligations, including purchase
commitments at December 31, 2007, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
|
|
|
|
Payment
due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Cash Obligations
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
|
Thereafter
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$ |
7,854 |
|
$ |
7,854 |
|
$ |
- |
|
$ |
- |
|
|
$ |
- |
|
Operating
leases
|
|
|
6,184 |
|
|
1,672 |
|
|
3,315 |
|
|
1,197 |
|
|
|
- |
|
Purchase
obligations
|
|
|
9,295 |
|
|
9,295 |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$ |
23,333 |
|
$ |
18,821 |
|
$ |
3,315 |
|
$ |
1,197 |
|
|
$ |
- |
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates,
based on historical experience, and various other assumptions that are believed
to be reasonable under the circumstances, 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 from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect significant judgments
and estimates used in the preparation of our consolidated financial
statements:
|
·
|
Accounts
Receivable. We typically extend credit to our
customers. Software licenses are generally due in installments
within twelve months from the date of delivery. Billings for
customer support and consulting services performed on a time and material
basis are due upon receipt. From time to time software and
consulting services are provided under fixed price contracts where the
revenue and the payment of related receivable balances are due upon the
achievement of certain milestones. Management estimates the
probability of collection of the receivable balances and provides an
allowance for doubtful accounts based upon an evaluation of our customers’
ability to pay and general economic
conditions.
|
|
·
|
Valuation of
Long-lived and Intangible Assets and Goodwill. We
test goodwill for impairment on an annual basis or more frequently if
certain events occur. Goodwill is to be measured for impairment
by reporting units, which currently consist of our operating
segments. At each impairment test for a business unit, we are
required to compare the carrying value of the business unit to the fair
value of the business unit. If the fair value exceeds the
carrying value, goodwill will not be considered impaired. If
the fair value is less than the carrying value, we will perform a second
test comparing the implied fair value of the business unit goodwill with
the carrying amount of that goodwill. The difference, if any,
between the carrying amount of that goodwill and the implied fair value
will be recognized as an impairment loss, and the carrying amount of the
associated goodwill will be reduced to its implied fair
value. These tests require us to make estimates and assumptions
concerning prices for similar assets and liabilities, if available,
or estimates and assumptions for other appropriate valuation
techniques.
|
|
|
For
our intangible assets with finite lives, including our capitalized
software and non-compete agreements, we assess impairment at least
annually or whenever events and circumstances suggest the carrying value
of an asset may not be recoverable based on the net future cash flows
expected to be generated from the asset on an undiscounted basis in
accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed” and SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets”. When we determine that the carrying value of
intangibles with finite lives may not be recoverable, we measure any
impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the
risk inherent in our current business
model. |
|
·
|
Application
Development. The costs to develop new software
products and enhancements to existing software products are expensed as
incurred until Technological Feasibility has been
established. Technological Feasibility has occurred when all
planning, designing, coding and testing have been completed according to
design specifications. Once Technological Feasibility is
established, any additional costs would be capitalized, in accordance with
SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed”.
|
|
·
|
Revenue
Recognition. Our revenue recognition policy is
significant because our revenue is a key component of our results of
operations. In addition, our revenue recognition determines the
timing of certain expenses such as commissions and
royalties. We follow specific and detailed guidelines in
measuring revenue; however, certain judgments affect the application of
our revenue policy.
|
|
|
We
license software under non-cancelable agreements and provide related
services, including consulting and customer support. We recognize revenue
in accordance with Statement of Position 97-2, “Software Revenue
Recognition” (“SOP 97-2”), as amended and interpreted by Statement of
Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions” as well as Staff Accounting Bulletin
(“SAB”) 101, “Revenue Recognition”, updated by SABs 103 and 104, “Update
of Codification of Staff Accounting Bulletins”, and Technical Practice
Aids issued from time to time by the American Institute of Certified
Public Accountants. When a software sales arrangement requires
professional services related to significant production, modification or
customization of software, or when a customer considers our professional
services essential to the functionality of the software product, we follow
the guidance in Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.”. |
|
|
We
recognize software license revenue, including third party license revenues
or partner products, from sales to end users or resellers upon the
occurrence of all of the following
events: |
|
a)
|
execution
of agreements, contracts, purchase orders, or other arrangements,
generally signed by both parties (except in customer specific or
procedural instances in which we have a customary business practice of
accepting orders without signed
agreements);
|
|
b)
|
delivery
of the software;
|
|
c)
|
establishment
of a fixed or determinable license
fee;
|
|
d)
|
reasonable
assurance of the collectability of the proceeds;
and
|
|
e)
|
determination
that vendor specific objective evidence (“VSOE”) of fair value exists for
any undelivered elements of the
arrangement.
|
|
|
If
a software license arrangement with an end user contains customer
acceptance criteria, revenue is recognized when we can objectively
demonstrate that the software can meet the acceptance criteria or the
acceptance period lapses, whichever occurs earlier. If a
software license arrangement with an end user contains a cancellation
right, the software revenue is recognized upon the expiration of the
cancellation right. Typically, payments for our software
licenses are due in installments within twelve months from the date of
delivery. Where software license agreements call for payment
terms of twelve months or more from the date of delivery, revenue is
recognized as payments become due and all other conditions for revenue
recognition have been satisfied. |
|
|
Software
license revenue derived from sales to resellers who purchase our product
for resale to end users is recognized upon delivery of the software to the
reseller based on our Business Partner contracts and our Business Partner
Return Policy which limits our exposure to costs and losses that may occur
in connection with the return of software licenses. Our
selection of resellers to act as business partners and the terms of the
related contracts meet the qualifications for revenue recognition under
SFAS No. 48, “Revenue Recognition When Right of Return
Exists”. Based on our experience with our return policy,
our exposure to losses from returns by resellers at the end of any
reporting period is immaterial. |
|
|
We
have established VSOE for all elements included in our sales contracts –
license fees and upgrades, professional services, and maintenance
services. License fees and upgrades are based on an established
matrix of prices applicable to each customer’s system
requirements. Professional services related to modification,
implementation, and installation of systems and training of customer
personnel are based on standardized hourly rates for the skill level of
service performed. Maintenance revenues are based on a schedule
of fees applicable to the customers’ varying maintenance requirements, and
are generated by contracts that are separate from arrangements to provide
licenses and/or services to our customers. The revenue from
undelivered elements in an arrangement at the end of any reporting period
is deferred based on the VSOE of that element. Deferred revenue
consists primarily of deferred license fees, unearned maintenance contract
revenue, and unearned contract revenue accounted for using the completed
contract method. |
|
|
Some
of our software license arrangements require professional services for
significant production, customization or modification of the software, or
to meet the customer’s requirements for services that are essential to the
functionality of the software product. In these arrangements,
both the software licenses revenue and the professional services revenue
are recognized using the percentage of completion method, based on labor
hours incurred versus the estimate of total hours required to complete the
project under the guidance of SOP 81-1. Any expected losses on
contracts in progress are recorded in the period in which the losses
become probable and reasonably estimable. Contracts whose scope
does not allow a reasonable estimation of the percentage of completion,
that contain clauses that present a significant potential impediment to
completion, or that contain a cancellation right are accounted for using
the completed contract method. |
|
|
In
addition to professional services performed in conjunction with the sales
of new licenses or license upgrades, we perform consulting services that
are separately priced, are generally available from a number of suppliers,
and include project management, system planning, design and
implementation, customer configurations, and training. These
consulting services are billed on both an hourly basis (Time and Material)
and under fixed price contracts. Consulting services revenue
billed on an hourly basis is recognized as the work is
performed. On fixed price contracts, consulting services
revenue is recognized using the percentage of completion method of
accounting by relating hours incurred to date to total estimated hours at
completion. We have, from time to time, provided software and
consulting services under fixed price contracts having a payment schedule
based on the achievement of certain milestones. Provided that
we are able to determine that the services being performed will meet the
milestone criteria, we recognize revenue on these contracts on the
percentage of completion method without reference to the
milestones. Otherwise, we defer the earned revenue determined
under the percentage of completion method until the milestone(s) has been
achieved. |
|
|
Customer
support services include post-contract support and the rights to
unspecified upgrades and enhancements. Maintenance revenues
from ongoing customer support services are billed on a monthly basis and
recorded as revenue in the applicable month, or on an annual basis with
the revenue being deferred and recognized ratably over the maintenance
period. |
|
·
|
Registration Rights
Agreements. We classify the liquidated damages
clause contained in the Registration Rights Agreements entered
concurrently with the various long-term debt instruments pursuant to
Emerging Issues Task Force Issue No. 05-4, “The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to Issue No.
00-19” (“EITF 05-4”) as a separate financial
instrument. Following the guidance of FASB Staff Position No.
EITF 00-19-2, we recognize the contingent obligation to make future
payments under the Registration Rights Agreements in accordance with SFAS
No. 5, “Accounting for
Contingencies”.
|
|
·
|
Stock-Based
Compensation. Effective April 1, 2005, we
commenced accounting for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), “Share-Based Payment”, issued in December
2004 as a revision of SFAS No. 123 and requiring that the cost resulting
from share based payments be recognized n the financial statements using a
fair value measurement. The share-based payments arise from the
grant of stock options from one of the plans described in Note 12 and
compensation is recorded using a closed-form option-pricing model
which assumes that the option exercises occur at the end of the
contractual term and that the expected volatility, expected dividends, and
risk-free interest rates are constant over the option’s
term.
|
|
|
We
account for the cost of stock-based compensation on a straight-line basis
over the requisite service period for the entire award. In
adopting the provisions of SFAS 123(R), we used the Modified Prospective
Application to account for the compensation cost of the portion of
previously–issued stock options for which the requisite service period had
not been rendered at March 31,
2005. |
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. SFAS No. 141(R) revises SFAS No. 141, “Business
Combinations” to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects by recognizing
and measuring the identifiable assets acquired, liabilities assumed, and any
non-controlling interest in the acquiree; recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain purchase; and
determining the information to be disclosed. The provisions of this
Statement are effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements". SFAS No. 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. The provisions of this Statement
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk represents the risk of loss that may impact our consolidated financial
position, results of operations or cash flows. We are exposed to market risks,
which include changes in foreign currency exchange rate as measured against the
U.S. dollar.
INTEREST
RATE RISK
At
December 31, 2007, we have $2.1 million of outstanding debt under the Laurus
2004 Convertible Note issued July 12, 2004 bearing interest at the prime rate
plus 2%. At December 31, 2007 the applicable interest
rate, based on the prime rate, is 9.25%.
At
December 31, 2007, we have $3.2 million outstanding under the June
2005 Convertible Notes issued June 15, 2005 bearing interest at the prime rate
plus 1%. At December 31, 2007, the applicable interest rate, based on
the prime rate, is 8.25%.
At
December 31, 2007, we have $0.9 million outstanding under term notes to
Midsummer bearing interest at the prime rate plus 2%. At December 31,
2007, the applicable interest rate, based on the prime rate, is
9.25%.
FOREIGN
CURRENCY EXCHANGE RATE RISK
We
conduct business in various foreign currencies, primarily in
Europe. Sales are typically denominated in the local foreign
currency, which creates exposures to changes in exchange rate. These
changes in the foreign currency exchange rates as measured against the U.S.
dollar may positively or negatively affect our sales, gross margins and retained
earnings. We attempt to minimize currency exposure risk through
decentralized sales, development, marketing and support operations, in which
substantially all costs are local-currency based. There can be no
assurance that such an approach will be successful, especially in the event of a
significant and sudden decline in the value of the foreign
currency. We do not hedge against foreign currency
risk. Approximately 20% of our total revenues were denominated in
currencies other than the U.S. dollar for each of the nine months ended December
31, 2007 and 2006, respectively.
EQUITY
PRICE RISK
We have
no direct equity investments.
ITEM
4. CONTROLS AND PROCEDURES
Our
management, including our principal executive officer and principal financial
and accounting officer, have conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), that were in effect at the end of the period covered by this
report. Based on their evaluation, our principal executive officer
and principal financial and accounting officer have concluded that our
disclosure controls and procedures were effective to ensure that all material
information relating to us that is required to be included in the reports that
we file with the SEC is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There are
no new reportable events and no material developments in the status of any legal
proceedings. See Note 10 to the accompanying financial
statements.
ITEM
1A. RISK FACTORS
INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION
CONTAINED IN OUR FORM 10-K FOR THE YEAR ENDED MARCH 31, 2007 AND FORM 10-Q FOR
THE QUARTER ENDED DECEMBER 31, 2007. INVESTING IN OUR COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THOSE DESCRIBED BELOW, RISKS AND
UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE
ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS OCCUR, OUR BUSINESS COULD BE HARMED. THE PRICE OF OUR
COMMON STOCK COULD DECLINE AND OUR INVESTORS MAY LOSE ALL OR PART OF THEIR
INVESTMENT. SEE THE NOTE REGARDING FORWARD-LOOKING STATEMENTS
INCLUDED AT THE BEGINNING OF ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THIS FORM 10-Q.
WE
INCURRED LOSSES FOR FISCAL YEARS 2007, 2006 AND 2005.
We
incurred losses of $7.2 million, $10.4 million and $20.9 million in the fiscal
years ended March 31, 2007, 2006, and 2005 respectively. The losses
in the past three years have generally been due to difficulties completing sales
for new application software licenses, the resulting change in sales mix toward
lower margin services, and debt service expenses. We will need to
generate additional revenue to achieve profitability in future
periods. If we are unable to achieve profitability, or maintain
profitability if achieved, our business and stock price may be adversely
affected and we may be unable to continue operations at current levels, if at
all.
WE HAD
NEGATIVE WORKING CAPITAL AT DECEMBER 31, 2007 AND IN THE PRIOR FISCAL YEAR, AND
WE HAVE EXTENDED PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At
December 31, 2007 and March 31, 2007, we had negative working capital of $11.2
million and $17.1 million, respectively. We have had difficulty
meeting operating expenses, including interest payments on debt, lease payments
and supplier obligations. We have at times deferred payroll for our
executive officers, and borrowed from related parties to meet payroll
obligations. We have extended payment terms with our trade creditors
wherever possible.
As a
result of extended payment arrangements with suppliers, we may be unable to
secure products and services necessary to continue operations at current levels
from these suppliers. In that event, we will have to obtain these
products and services from other parties, which could result in adverse
consequences to our business, operations and financial condition, and we may be
unable to obtain these products from other parties on terms acceptable to us, if
at all.
OUR
FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future
sales growth may depend on our ability to improve our financial
condition. Our past financial condition has made it difficult for us
to complete sales of new large enterprise application software
licenses. Because our large enterprise applications typically require
lengthy implementation and extended servicing arrangements, potential customers
require assurance that these services will be available for the expected life of
the application. These potential customers may defer buying decisions
until our financial condition improves, or may choose the products of our
competitors whose financial conditions are, or are perceived to be,
stronger. Customer deferrals or lost sales will adversely affect our
business, financial conditions and results of operations.
OUR LARGE
ENTERPRISE SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS
MAKES IT DIFFICULT FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The
length of large enterprise sales cycles in our business makes it difficult to
evaluate the effectiveness of our sales strategies. Our large
enterprise sales cycles historically have ranged from three to twelve months,
which has caused significant fluctuations in revenues from period to
period. Due to our difficulties in completing new application
software sales in recent periods and our refocused sales strategy, it is
difficult to predict revenues and properly budget expenses.
Our
software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change
established business practices when they install our software. Our
sales staff must dedicate significant time consulting with a potential customer
concerning the substantial technical and business concerns associated with
implementing our products. The purchase of our products is often
discretionary, so lengthy sales efforts may not result in a
sale. Moreover, it is difficult to predict when a license sale will
occur. All of these factors can adversely affect our business,
financial condition and results of operations.
OUR
OPERATING RESULTS AND REVENUE HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND
THEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate in the future as a result of several factors, which are outside of our
control, including the size and timing of orders, the general health of the
retail industry, the length of our sales cycles and technological
changes. If revenue declines in a quarter, our operating results will
be adversely affected because many of our expenses are relatively
fixed. In particular, sales and marketing, application development
and general and administrative expenses do not change significantly with
variations in revenue in a quarter. It is likely that in some future
quarter our revenues or operating results will be below the expectations of
public market analysts or investors. If that happens, our stock price
will likely decline.
Further,
due to these fluctuations, we do not believe period to period comparisons of our
financial performance are necessarily meaningful nor should they be relied on as
an indication of our future performance.
WE MAY
EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING RESULTS
TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may
experience slower sales of our applications and services from October through
December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our
third fiscal quarter and in other quarters, depending on our sales
cycles.
WE MAY
NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD IMPAIR
THE VALUE OF YOUR INVESTMENT.
We may
need to raise further capital to:
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support
unanticipated capital requirements;
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take
advantage of acquisition or expansion
opportunities;
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continue
our current development efforts;
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develop
new applications or services; or
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address
working capital needs.
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Our
future capital requirements depend on many factors including our application
development and sales and marketing activities. We do not know
whether additional financing will be available when needed, or available on
terms acceptable to us. If we cannot raise needed funds for the above
purposes on acceptable terms, we may be forced to curtail some or all of the
above activities and we may not be able to grow our business or respond to
competitive pressures or unanticipated developments.
We may
raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing
equity securities or convertible debt securities, our stockholders may
experience substantial dilution and the new securities may have greater rights,
preferences or privileges than our existing common stock.
INTANGIBLE
ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN
FINANCING.
Goodwill,
capitalized software, and other intangible assets represent approximately 66.6%
of our total assets as of December 31, 2007. We may have to impair or
write-off these assets, which will cause a charge to earnings and could cause
our stock price to decline. Any such impairment will also reduce our
assets, as well as the ratio of our assets to our liabilities. These
balance sheet effects could make it more difficult for us to obtain capital, and
could make the terms of capital we do obtain more unfavorable to our existing
stockholders.
FOREIGN
CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations
in currency exchange rates affect the prices of our applications and services
and our expenses, and foreign currency losses will negatively affect
profitability or increase losses. Approximately 32% of our revenues
were in the Americas, Europe and Asia, respectively, in the three months ended
December 31, 2007. Many of our expenses related to foreign sales,
such as corporate level administrative overhead and development, are denominated
in U.S. dollars. When accounts receivable and accounts payable
arising from international sales and services are converted to U.S. dollars, the
resulting gain or loss contributes to fluctuations in our operating
results. We do not hedge against foreign currency exchange rate
risks.
IF WE
LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL AND
SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL TECHNICAL
PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are
heavily dependent on our CEO, Barry Schechter. We believe our future
success will depend largely upon our ability to attract and retain
highly-skilled software programmers, managers and sales and marketing
personnel. Competition for personnel is intense, particularly in
international markets. The software industry is characterized by a
high level of employee mobility and aggressive recruiting of skilled
personnel. We compete against numerous companies, including larger,
more established companies, for our personnel. We may not be
successful in attracting or retaining skilled sales, technical and managerial
personnel, which could negatively affect our financial performance and cause our
stock price to decline.
WE ARE
DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE RETAIL
INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES HAVE BEEN
AND MAY CONTINUE TO BE SLOW.
Our
future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the
licensing of software applications and the performance of related professional
and consulting services to the retail industry. The retail industry
as a whole is currently experiencing increased competition and weakening
economic conditions that could negatively impact the industry and our customers'
ability to pay for our products and services. In addition, the retail
industry may be consolidating, and it is uncertain how consolidation will affect
the industry. Such consolidation and weakening economic conditions
have in the past, and may in the future, negatively impact our revenues, reduce
the demand for our products and may negatively impact our business, operating
results and financial condition. Specifically, uncertain economic
conditions and the specter of terrorist activities have adversely impacted sales
of our software applications, and we believe mid-tier specialty retailers may be
reluctant during the current economic climate to make the substantial
infrastructure investment that generally accompanies the implementation of our
software applications, which may adversely impact our business.
WE MAY
NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF THE
INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We
conduct business in an industry characterized by intense
competition. Most of our competitors are very large companies with an
international presence. We must also compete with smaller companies
which have been able to develop strong local or regional customer
bases. Many of our competitors and potential competitors are more
established, benefit from greater name recognition and have significantly
greater resources than us. Our competitors may also have lower cost
structures and better access to the capital markets than us. As a
result, our competitors may be able to respond more quickly than we can to new
or emerging technologies and changes in customer requirements. Our
competitors may:
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introduce
new technologies that render our existing or future products obsolete,
unmarketable or less competitive;
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make
strategic acquisitions or establish cooperative relationships among
themselves or with other solution providers, which would increase the
ability of their products to address the needs of our customers;
and
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establish
or strengthen cooperative relationships with our current or future
strategic partners, which would limit our ability to compete through these
channels.
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We could
be forced to reduce prices and suffer reduced margins and market share due to
increased competition from providers of offerings similar to, or competitive
with, our applications, or from service providers that provide services similar
to our services. Competition could also render our technology
obsolete.
OUR
MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The
retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We
must cost-effectively develop and introduce new applications and related
services that keep pace with technological developments to
compete. If we do not gain market acceptance for our existing or new
offerings or if we fail to introduce progressive new offerings in a timely or
cost-effective manner, our financial performance will suffer.
The
success of application enhancements and new applications depends on a variety of
factors, including technology selection and specification, timely and efficient
completion of design, and effective sales and marketing efforts. In developing
new applications and services, we may:
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Fail
to respond to technological changes in a timely or cost-effective
manner;
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Encounter
applications, capabilities or technologies developed by others that render
our applications and services obsolete or non-competitive or that shorten
the life cycles of our existing applications and
services;
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Experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new applications and services;
or
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Fail
to achieve market acceptance of our applications and
services.
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The life
cycles of our applications are difficult to estimate, particularly in the
emerging electronic commerce market. As a result, new applications
and enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR
PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY DEVELOP
APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our
success and competitive position is dependent in part upon our ability to
develop and maintain the proprietary aspects of our intellectual
property. Our intellectual property includes our trademarks, trade
secrets, copyrights and other proprietary information. Our efforts to
protect our intellectual property may not be successful. Effective
copyright and trade secret protection may be unavailable or limited in some
foreign countries. We hold no patents. Consequently,
others may develop, market and sell applications substantially equivalent to
ours or utilize technologies similar to those used by us, so long as they do not
directly copy our applications or otherwise infringe our intellectual property
rights.
We may
find it necessary to bring claims or initiate litigation against third parties
for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management
resources. These actions could also result in counterclaims
challenging the validity of our proprietary rights or alleging infringement on
our part. The ultimate outcome of any litigation will be difficult to
predict.
OUR
APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may
become subject to litigation involving patents or proprietary rights of third
parties. Patent and proprietary rights litigation entails substantial
legal and other costs, and we do not know if we will have the necessary
financial resources to defend or prosecute our rights in connection with any
such litigation. Responding to and defending claims related to our
intellectual property rights, even ones without merit, can be time consuming and
expensive and can divert management's attention from other business
matters. In addition, these actions could cause application delivery
delays or require us to enter into royalty or license
agreements. Royalty or license agreements, if required, may not be
available on terms acceptable to us, if they are available at
all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
DEVELOPMENT
AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS WITH OTHER
COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we
do not possess all of the technical and marketing resources necessary to develop
and market our offerings to target markets, our business strategy substantially
depends on our strategic relationships. While some of these
relationships are governed by contracts, most are non-exclusive and all may be
terminated on short notice by either party. If these relationships
terminate or fail to deliver the intended benefits, our development and
marketing efforts will be impaired and our revenues may decline. We
may not be able to enter into new strategic relationships, which could put us at
a disadvantage to those of our competitors, who do successfully exploit
strategic relationships.
OUR
PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially
all of our primary computer and telecommunications systems are located in four
geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business
interruption insurance may not adequately compensate us for our lost business
and will not compensate us for any liability we incur due to our inability to
provide services to our customers. Although we have implemented
network security measures, our systems are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. These
disruptions could lead to interruptions, delays, loss of data or the inability
to service our customers. Any of these occurrences could impair our
ability to serve our customers and harm our business.
IF
PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our
business exposes us to product liability risks. Any product liability
or other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our
applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of
our business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be
discovered only after the application has been implemented and used over time
with different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that
were discovered after they were sold. Our customers have also
occasionally experienced difficulties integrating our applications with other
hardware or software in their enterprise.
We are
not currently aware of any defects in our applications that might give rise to
future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could
result in loss of sales, delays in or elimination of market acceptance, damage
to our brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing
costs. In addition, third-party products, upon which our applications
are dependent, may contain defects which could reduce or undermine entirely the
performance of our applications.
Our
customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above
could result in significant financial or other damage to our
customers. Although our sales agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims, we do not know if these limitations of liability are enforceable or
would otherwise protect us from liability for damages to a customer resulting
from a defect in one of our applications or the performance of our
services. Our product liability insurance may not cover all claims
brought against us.
LAURUS
MASTER FUND, LTD. (LAURUS) HAS THE RIGHT TO ACQUIRE A SIGNIFICANT PERCENTAGE OF
OUR COMMON STOCK, WHICH IF ACQUIRED BY LAURUS, MAY ENABLE LAURUS TO EXERCISE
EFFECTIVE CONTROL OF US.
On July
12, 2004 and June 15, 2005, Laurus purchased convertible notes from us in the
amounts of $7 million and $3.2 million, respectively which are secured by all of
our assets. In addition, Laurus purchased our term note dated
November 16, 2005 in the amount of $637,500, which was amended to $1,275,000,
$2,025,000 and $2,625,000 on March 23, 2006, November 27, 2006 and March 31,
2007, respectively. At December 31, 2007, convertible notes may be
converted into 33,262,476 shares of our common stock. In addition,
warrants and options issued in connection with the sale of the convertible and
term notes are exercisable for approximately 28,700,000 shares of our common
stock. Consequently, Laurus beneficially owns approximately 40.7% of
our outstanding common stock. If Laurus converts the convertible
notes to common stock and exercises the warrants and options, it may have
effective control over all matters affecting us, including:
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The
election of all of our directors;
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The
undertaking of business opportunities that may be suitable for
us;
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Any
determinations with respect to mergers or other business combinations
involving us;
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The
acquisition or disposition of assets or businesses by
us;
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Debt
and equity financing, including future issuance of our common stock or
other securities;
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Amendments
to our charter documents;
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The
payment of dividends on our common stock;
and
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Determinations
with respect to our tax returns.
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LAURUS
MASTER FUND, LTD’S POTENTIAL INFLUENCE ON US COULD MAKE IT DIFFICULT FOR ANOTHER
COMPANY TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Laurus’
potential effective voting control could discourage others from initiating any
potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a
result, Laurus’ potential effective control could reduce the price that
investors may be willing to pay in the future for shares of our stock, or could
prevent any party from attempting to acquire us at any price.
OUR STOCK
PRICE HAS BEEN HIGHLY VOLATILE.
The
market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or
services, change pricing policies, experience quarterly fluctuations in
operating results, announce strategic relationships or acquisitions, change
earnings estimates, experience government regulatory actions or suffer from
generally adverse economic conditions, our stock price could be
affected. Some of the volatility in our stock price may be unrelated
to our performance. Recently, companies similar to ours have
experienced extreme price fluctuations, often for reasons unrelated to their
performance.
WE HAVE
NEVER PAID A DIVIDEND ON OUR COMMON STOCK NOR DO WE INTEND TO PAY DIVIDENDS ON
OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have
not previously paid any cash or other dividend on our common
stock. We anticipate that we will use our earnings and cash flow for
repayment of indebtedness, to support our operations, and for future growth, and
we do not have any plans to pay dividends in the foreseeable
future. Future equity financing(s) may further restrict our ability
to pay dividends.
THE TERMS
OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are
authorized to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board of directors may determine the terms of subsequent
series of preferred stock without further action by our
stockholders. If we issue preferred stock, it could affect your
rights or reduce the value of your common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to a third
party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred
stock.
SHARES
ISSUABLE UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES OR UNDER ANTI-DILUTION PROVISIONS IN CERTAIN AGREEMENTS COULD DILUTE YOUR
STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have
issued options and warrants to acquire common stock to our employees and certain
other persons at various prices, some of which are or may in the future have
exercise prices at below the market price of our stock. We have
outstanding options and warrants for shares at December 31, 2007. Of
these options and warrants, shares have exercise prices above the December 31,
2007 market price of $0.06 per share, and shares have exercise prices at or
below that market price. If exercised, these options and warrants
will cause immediate and possibly substantial dilution to our
stockholders.
Our
existing stock option plans have approximately shares available for issuance as
of December 31, 2007. Future options issued under the plan may have
further dilutive effects.
The
issuance of additional shares pursuant to exercisable options, warrants,
convertible notes or anti-dilution provisions will cause immediate and possibly
substantial dilution to our stockholders. Further, subsequent sales
of the shares in the public market could depress the market price of our stock
by creating an excess in supply of shares for sale. Issuance of these
shares and sale of these shares in the public market could also impair our
ability to raise capital by selling equity securities.
BUSINESS
RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page
Digital is a developer of multi-channel commerce software and faces several
business risks that could disadvantage our business. These risks
include many of the risks that we face, described above, as well
as:
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DEFECTS
IN PRODUCTS COULD DIMINISH DEMAND FOR PRODUCTS AND RESULT IN LOSS OF
REVENUES - From time to time errors or defects may be found in Page
Digital's existing, new or enhanced products, resulting in delays in
shipping, loss of revenues or injury to Page Digital's
reputation. Page Digital's customers use its products for
business critical applications. Any defects, errors or other
performance problems could result in damage to Page Digital's customers'
businesses. These customers could seek significant compensation
from Page Digital for any losses. Further, errors or defects in
Page Digital's products may be caused by defects in third-party software
incorporated into Page Digital products. If so, Page Digital
may not be able to fix these defects without the assistance of the
software providers.
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FAILURE
TO FORMALIZE AND MAINTAIN RELATIONSHIPS WITH SYSTEMS INTEGRATORS COULD
REDUCE REVENUES AND HARM PAGE DIGITAL'S ABILITY TO IMPLEMENT PRODUCTS - A
significant portion of Page Digital's sales are influenced by the
recommendations of systems integrators, consulting firms and other third
parties who assist with the implementation and maintenance of Page
Digital's products. These third parties are under no obligation
to recommend or support Page Digital's products. Failing to
maintain strong relationships with these third parties could result in a
shift by these third parties toward favoring competing products, which
could negatively affect Page Digital's software license and service
revenues.
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PAGE
DIGITAL'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO
PAGE DIGITAL'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO DEVELOP AND
INTRODUCE NEW APPLICATIONS AND RELATED SERVICES - The retail software
industry is characterized by rapid technological change, evolving
standards and wide fluctuations in supply and demand. Page
Digital must cost-effectively develop and introduce new applications and
related services that keep pace with technological developments to
compete. If Page Digital fails to gain market acceptance for
its existing or new offerings or if Page Digital fails to introduce
progressive new offerings in a timely or cost-effective manner, our
financial performance may suffer.
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FAILURE
TO PROTECT PROPRIETARY RIGHTS OR INTELLECTUAL PROPERTY, OR INTELLECTUAL
PROPERTY INFRINGEMENT CLAIMS AGAINST PAGE DIGITAL COULD RESULT IN PAGE
DIGITAL LOSING VALUABLE ASSETS OR BECOMING SUBJECT TO COSTLY AND
TIME-CONSUMING LITIGATION - Page Digital's success and ability to compete
depend on its proprietary rights and intellectual
property. Page Digital relies on trademark, trade secret and
copyright laws to protect its proprietary rights and intellectual
property. Despite Page Digital's efforts to protect
intellectual property, a third party could obtain access to Page Digital's
software source code or other proprietary information without
authorization, or could independently duplicate Page Digital's
software. Page Digital may need to litigate to enforce
intellectual property rights. If Page Digital is unable to
protect its intellectual property it may lose a valuable
asset. Further, third parties could claim Page Digital has
infringed their intellectual property rights. Any claims, regardless of
merit, could be costly and time-consuming to
defend.
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COMPETITION
IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE PAGE DIGITAL'S SALES OR
PREVENT THEM FROM ACHIEVING PROFITABILITY - The market for Page Digital's
products is intensely competitive and subject to rapid technological
change. Competition is likely to result in price reductions,
reduced gross margins and loss of Page Digital's market share, any one of
which could reduce future revenues or earnings. Further, most
of Page Digital's competitors are large companies with greater resources,
broader customer relationships, greater name recognition and an
international presence. As a result, Page Digital's competitors
may be able to better respond to new and emerging technologies and
customer demands.
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BUSINESS
RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a
provider of retail management store solutions to small through mid-tier
retailers via an international network of retailers and faces several business
risks that could disadvantage our business. These risks include many of the
risks that we face, described above, as well as:
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RTI
FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE INDUSTRY - RTI
operates in an extremely competitive industry, which is subject to rapid
technological and market changes. We anticipate that the
competition will increase as more companies focus on providing technology
solutions to small and mid-tier retailers. Many of our current
and potential competitors, such as Microsoft, have more resources to
devote to product development, marketing and
distribution. While RTI believes that it has competitive
strengths in its market, there can be no assurance that RTI will continue
to compete successfully against larger more established
competitors.
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RTI
IS DEPENDENT ON THEIR VALUE-ADDED RESELLERS (VARS) - RTI does not have a
direct sales force and relies on VARs to distribute and sell its
products. RTI currently has approximately 67 VARs - 27 in North
America, 7 in South America, 11 in Asia, 19 in Europe and the Middle East,
1 in Africa, and 1 each in Australia and New Zealand. Combined,
RTI's four largest VARs account for approximately 14% of its revenues,
although no one is over 4%. RTI's VARs are independently owned
businesses and there can be no assurance that one or more will not go out
of business or cease to sell RTI products. Until a replacement
VAR could be recruited, and trained, or until an existing VAR could expand
into the vacated territory, such a loss could result in a disruption in
RTI's revenue and profitability. Furthermore, there can be no
assurance that an adequate replacement could be
located.
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A
PROLONGED SLOWDOWN IN THE GLOBAL ECONOMY COULD ADVERSELY IMPACT RTI'S
REVENUES - A slowdown in the global economy might lead to decreased
capital spending, fewer new retail business start ups, and slower new
store expansion at existing retail businesses. Such conditions,
even on a regional basis could severely impact one or more of RTI's VARs
and result to a disruption in RTI's revenues, and
profitability.
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RTI'S
PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO RTI'S
SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO DEVELOP AND INTRODUCE NEW
APPLICATIONS AND RELATED SERVICES - We believe RTI's ability to succeed in
its market is partially dependent on its ability to identify new product
opportunities and rapidly, cost-effectively bring them to
market. However, there is no guarantee that they will be able
to gain market acceptance for any new products. In addition,
there is no guarantee that one of RTI competitors will not be able to
bring competing applications to market faster or market them more
effectively. Failure to successfully develop new products,
bring them to market and gain market acceptance could result in decreased
market share and ultimately have a material adverse affect on
RTI.
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RTI
DOES NOT HOLD ANY PATENTS OR COPYRIGHTS, ANY TERMINATION OF OR ADVERSE
CHANGE TO RTI'S LICENSE RIGHTS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS - RTI has a license to develop, modify, market, sell, and support
its core technology from a third party. Any termination of, or
disruption in this license could have a material adverse affect on RTI's
business. Further, we believe that most of the technology used
in the design and development of RTI's core products is widely available
to others. Consequently, there can be no assurance that others
will not develop, and market applications that are similar to RTI's, or
utilize technologies that are equivalent to RTI's. Likewise,
while RTI believes that its products do not infringe on any third party's
intellectual property, there can be no assurance that they will not become
involved in litigation involving intellectual property
rights. If such litigation did occur, it could have a material
adverse affect on RTI's business.
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ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the three months ended December 31,, 2007, there were no unregistered sales of
equity securities.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
During
the three months ended December 31, 2007, there were no defaults upon senior
securities. On February 28, 2008, the Company acknowledged
occurrences of default with three notes and accordingly acknowledged default
payments in the amount of $755,626. The entire amount of the penalty
has been recognized and paid as of December 31, 2007. The Company
acknowledged occurances of default under the Midsummer indebtedness and is
presently finalizing an agreement to restructure that indebtedness.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the three months ended December 31, 2007, no matters were submitted to a vote of
security holders.
ITEM
5. OTHER INFORMATION
The
information required to be disclosed on Form 8-K during the three months ended
December 31, 2007 was as follows:
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
EXHIBITS
31.1
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Certification
of CEO required pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
of CFO required pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification
of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
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32.2
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Certification
of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
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(b) REPORTS ON
FORM 8-K
32.3
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On
March 26, 2008, we filed a Form 8-K dated March 20, 2008, disclosing as
Item 5.02 (c) the appointment of John C. Redding as the Company's
corporate Secretary, effective March 20,
2008.
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SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant
has duly cause this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May
29, 2008
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Retail
Pro, Inc.
Registrant
/S/ Alfred F.
Riedler
Vice
President of Finance
(Principal
Financial and Accounting Officer)
Signing
on behalf of the registrant
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33