UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
Form 10-Q
______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 2004
0-15066
Commission file Number
______________
VERTEX INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
______________
New Jersey 22-2050350
(State of Incorporation) (I.R.S. Employer Identification No.)
3619 Kennedy Road, South Plainfield, New Jersey 07080
(Address of Principal Executive Offices) (Zip Code)
(908) 756-2000
(Registrant's Telephone Number)
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 _____
Common stock, par value $.005 per share: 48,201,978 shares
outstanding as of March 31, 2004.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of March 31, 2004.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of March 31, 2004.
Preferred stock, Series "C", par value $.01 per share: 997
shares outstanding as of March 31, 2004.
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
March 31, 2004
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3 - 4
March 31, 2004 (Unaudited) and September 30, 2003
Condensed Consolidated Statements of Operations 5
For the three and six months ended
March 31, 2004 and 2003 (Unaudited)
Condensed Consolidated Statement of Changes in 6 - 7
Stockholders' Deficiency For the six months
ended March 31, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows 8
For the six months ended March 31, 2004 and 2003
(Unaudited)
Notes to the Condensed Consolidated Financial
Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis Of 23
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security 32
Holders
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
2
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
2004 2003
(Unaudited)
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,871 $ 25,265
Accounts receivable, less allowance for doubtful accounts
of $456,358 at March 31, 2004 and September 30, 2003 264,644 639,208
Inventories, net of valuation allowance 475,305 537,337
Prepaid expenses and other current assets 48,194 20,103
------------ -----------
Total current assets 794,014 1,221,913
Equipment and improvements, net of accumulated depreciation
and amortization of $1,345,354 at March 31, 2004 and
$1,320,152 at September 30, 2003 45,047 70,249
Capitalized software costs, net of accumulated
amortization of $289,391 at March 31, 2004 and
$231,513 at September 30, 2003 57,878 115,756
Other assets 111,273 111,273
------------ ------------
Total assets $ 1,008,212 $ 1,519,191
============ ============
See notes to condensed consolidated financial statements.
3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
March 31, September 30,
2004 2003
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Notes payable - unrelated parties $ 1,896,900 $ 1,869,236
Notes payable - related parties 4,233,187 4,095,848
Convertible notes payable - related parties 2,294,324 2,294,324
Cash overdraft 6,062 -
Accounts payable 4,549,743 4,533,875
Net liabilities associated with subsidiaries
in liquidation 7,643,547 8,511,077
Payroll and related benefits accrual 2,402,754 2,622,354
Litigation related accruals 4,096,104 4,077,665
Other accrued expenses and liabilities 5,112,677 4,870,759
Deferred revenue 481,575 305,243
------------- -----------
Total current liabilities 32,716,873 33,180,381
------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A preferred stock, par value $.01 per share; 2,000,000
shares authorized, 1,356,852 shares issued and outstanding
($10,000,000 aggregate liquidation preference) 13,569 13,569
Series B preferred stock, par value $0.01 per share;
1,000 shares authorized, 1,000 shares issued and outstanding
($1,000,000 aggregate liquidation preference) 10 10
Series C preferred stock, par value $0.01 per share;
10,000 shares authorized, 997 shares issued and outstanding
($997,000 aggregate liquidation preference) 10 10
Common stock, par value $.005 per share; 75,000,000 shares
authorized; 48,201,978 shares issued and outstanding 241,011 241,011
Additional paid-in capital 155,418,295 155,364,295
Unearned income (400,000) (400,000)
Accumulated deficit (185,176,889) (184,332,055)
Accumulated other comprehensive loss (1,737,427) (2,480,790)
Less: Treasury stock, 87,712 shares of common stock (at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (31,708,661) (31,661,190)
------------- -------------
Total liabilities and stockholders' deficiency $ 1,008,212 $ 1,519,191
============= =============
See notes to condensed consolidated financial statements.
4
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, For the Six Months Ended March 31,
---------------------------------- ----------------------------------
2004 2003 2004 2003
-------------- -------------- --------------- ----------------
REVENUES $ 517,816 $1,174,553 $ 1,350,086 $ 2,456,689
COST OF SALES 235,738 529,473 775,715 1,169,456
-------------- ------------ --------------- --------------
GROSS PROFIT 282,078 645,080 574,371 1,287,233
-------------- ------------ --------------- --------------
OPERATING EXPENSES:
Selling and administrative 504,209 1,244,092 1,103,649 2,603,819
Depreciation and amortization 39,885 66,328 83,080 137,987
-------------- ------------ --------------- ---------------
Total operating expenses 544,094 1,310,420 1,186,729 2,741,806
-------------- ------------ --------------- --------------
OPERATING LOSS (262,016) (665,340) (612,358) (1,454,573)
-------------- ------------ --------------- --------------
OTHER INCOME (EXPENSES):
Interest income - 2,703 - 3,903
Interest expense (235,035) (203,328) (514,306) (368,073)
Gain on liquidation
of foreign subsidiaries 320,951 - 320,951 -
Other (10,534) 2,210 (39,126) (5,102)
-------------- ----------- --------------- --------------
Net other income (expense) 75,382 (198,415) (232,476) (369,272)
-------------- ----------- --------------- --------------
NET LOSS $ (186,634) $(863,755) $ (844,834) $ (1,823,845)
============== ============ =============== ==============
Net loss per share of
common stock:
Basic and diluted ($.00) ($.02) ($.02) ($.05)
============== ============ =============== ==============
Weighted average number of
shares outstanding:
Basic and diluted 48,201,978 37,201,978 48,201,978 37,201,978
============== ============ =============== ==============
See notes to condensed consolidated financial statements.
5
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
Preferred Stock Common Stock Additional
--------------- ----------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -----------
Balance September 30, 2003 1,358,849 $ 13,589 48,201,978 $241,011 $155,364,295
Effects of issuance of warrants
with notes payable - related parties 54,000
Net loss(A)
Change in unrealized foreign
exchange translation gains/losses(A) - -
Reclassification into current period earnings
---------- -------- ---------- -------- ------------
Balance March 31, 2004 1,358,849 $13,589 48,201,978 $241,011 $155,418,295
========== ======== ========== ======== ============
See notes to condensed consolidated financial statements.
6
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
(CONTINUED)
Accumulated
Other
Unearned Accumulated Comprehensive Treasury
Income Deficit Loss Stock Total
---------- ------------ -------------- --------- -------------
Balance September 30, 2003 $(400,000) $(184,332,055) $(2,480,790) $ (67,240) $(31,661,190)
Effects of issuance of warrants
with notes payable - related parties 54,000
Net loss(A) (844,834) (844,834)
Change in unrealized foreign
exchange translation
gains/losses(A) (329,845) (329,845)
Reclassification into current period
earnings 1,073,208 1,073,208
----------- -------------- ------------ --------- -------------
Balance March 31, 2004 $(400,000) $ (185,176,889) $(1,737,427) $(67,240) $(31,708,661)
=========== ============== ============ ========== =============
(A) Comprehensive (income)loss for the three and six months ended March 31, 2004 totaled $(186,210) and
$1,174,679 respectively.
See notes to condensed consolidated financial statements.
7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended March 31,
-----------------------------------
2004 2003
--------------- --------------
Cash Flows from Operating Activities:
- ------------------------------------
Net loss $(844,834) ($1,823,845)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 83,080 137,987
Charges to interest expense for warrants
issued with note payable - related parties 54,000 -
Gain on liquidation of foreign subsidiaries (320,951) -
Changes in assets and liabilities:
Accounts receivable, net 374,564 427,151
Inventories, net 62,032 161,555
Prepaid expenses and other current assets (28,091) 60,065
Other assets - 36,692
Accounts payable 15,868 117,479
Accrued expenses and other liabilities 237,541 418,394
Advances from customers - (343,547)
Deferred revenue 176,332 (431,944)
----------- -----------
Net cash used in operating activities (190,459) (1,240,013)
----------- -----------
Cash Flows from Financing Activities:
- -------------------------------------
Proceeds from notes and convertible notes payable -
related parties 137,339 1,207,931
Repayment of senior credit facility - (145,736)
Proceeds from notes payable - 250,000
Cash overdraft 6,062 -
----------- -----------
Net cash provided by financing activities 143,401 1,312,195
----------- -----------
Effect of exchange rate changes on cash 27,664 -
----------- -----------
Net increase (decrease) in cash and cash equivalents (19,394) 72,182
Cash and cash equivalents at beginning of period 25,265 74,016
----------- -----------
Cash and cash equivalents at end of period $ 5,871 $146,198
=========== ===========
See notes to condensed consolidated financial statements.
8
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Background and Description of Business
Vertex Interactive, Inc. ("Vertex" or "we" or "our" or the
"Company") is a global provider of supply chain management ("SCM")
technologies, including enterprise software systems and
applications, that enable our customers to manage their
orders, inventory and warehouse needs, consultative services,
and software and hardware service and maintenance. We serve
our clients through three general product and service lines:
(1) enterprise solutions; (2) point solutions; and, (3)
service and maintenance for our products and services,
including service and maintenance of software and hardware we
resell for third parties. Our enterprise solutions include a
suite of Java'TM'-architected software applications,
applications devoted to the AS/400 customer base, as well as a
portfolio of "light-directed" systems for inventory, warehouse and
distribution center management. Our point solutions provide an
array of products and services designed to solve more specific
customer needs from managing a mobile field workforce,
mobile data collection, distributed bar code printing
capabilities, compliance labeling applications, automated card
devices, software development tools and proprietary software
serving SAP R/3 users. We provide a full range of software and
hardware support services and maintenance on a 24-hour, 7-days a
week, 365-days a year basis, including the provision of wireless
and wired planning and implementation services for our customers'
facilities.
In August 2002, Vertex formed XeQute Solutions, Inc. ("XeQute"),
a Delaware corporation, which is an indirect, wholly-owned
subsidiary. XeQute purchased most of the operating assets and
assumed certain liabilities of both Vertex and its principal
North American subsidiaries and became the principal operating
entity of the group effective October 1, 2002. These assets
comprise substantially all of the enterprise software businesses
of Vertex. XeQute is a wholly-owned subsidiary of XeQute
Solutions PLC ("XeQute PLC") which is a holding company that is
a direct, wholly-owned subsidiary of Vertex.
As of March 31, 2004, the Company's securities have been approved to
return to the bulletin board for trading. From February 2003 to
March 2004, the Company's securities were quoted on the Pink
Sheets, under the symbol "VETXE".
9
Going Concern Matters
Based upon our substantial working capital deficiency and stockholders'
deficiency of approximately $31,923,000 and $31,709,000 at March 31,
2004, respectively, our recurring losses, our historic rate of cash
consumption, the uncertainty arising from our defaults on substantially
all of our notes payable, the uncertainty of our liquidity-related
initiatives described in detail below, and the reasonable possibility
of on-going negative impacts on our operations from the overall economic
environment for a further unknown period of time, there is substantial
doubt as to our ability to continue as a going concern.
The successful implementation of our business plan has required, and our
ability to continue as a going concern will require on a going forward basis,
the Company to raise substantial funds to finance (i) continuing operations,
(ii) the further development of our enterprise software technologies,
(iii) the settlement of existing liabilities including past due payroll
obligations to our employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be necessary
to enable us to remain competitive in the global SCM industry. There can
be no assurance that we will be successful in raising the necessary funds.
Outlook:
Our sources of ongoing liquidity include the cash flows from our operations,
potential new credit facilities and potential additional equity investments.
Consequently, Vertex continues to aggressively pursue obtaining
additional debt and equity financing, the restructuring of certain existing
debt obligations, and the reduction of its operating expenses. In addition, it
has structured its overall operations and resources around high margin
enterprise products and services. However, in order to remain in business,
the Company must raise additional cash in a timely fashion.
Initiatives Completed or in Process:
The following initiatives related to raising the required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) As of March 31, 2004, the Company had borrowed approximately $6,528,000
from MidMark, a company that owns shares of Vertex's preferred and
common stock (See Note 5). MidMark Capital L.P. and its affiliate, MidMark
Capital II, L.P., and certain individuals related to these two entities,
are referred to collectively as "MidMark".
10
Included in the aforementioned amount payable to MidMark is $281,287
which has been borrowed under a Grid Note which provides for up to
$1,000,000 of availability from MidMark. This note will be funded by
the proceeds, if any, from the sale of any shares of Vertex common stock
held by MidMark (see Note 5).
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations, and based
on the continuing cash drain from these operations, during fiscal 2002
the respective boards of directors determined that in the best interest
of their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their
respective creditors. During the three months ended March 31, 2004,
we recognized a noncash gain of $320,000 from the approval by
creditors of the liquidation of the net liabilities of the Company's
U.K. subsidiary (see Note 2). Upon legal resolution of the approximately
$7,644,000 of net liabilities of the remaining European entities
as of March 31, 2004 we expect to recognize a non-cash gain (without any
significant cash outlay); however, the amount and timing of such gain
and cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators.
(iii) We have continued to reduce headcount (to approximately 20
employees in our continuing North American business at March
31, 2004, of whom 5 were furloughed until additional funds are raised),
consolidate facilities and generally reduce costs.
(iv) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had an estimated fair
market value at that time of approximately $400,000, to American
Marketing Complex, Inc. ("AMC")(see Note 6). Payment for this purchase
was in the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily
indicative of the ultimate fair value or settlement value of the
cash equivalent trade credits. Any trade credits not utilized by
June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year.
11
(v) We are seeking to settle certain of our current liabilities
through non-cash transactions. Vertex is negotiating with vendors
to settle balances at substantial discounts, including through
the use of the cash equivalent trade credits set forth in (v)
above. In addition, we are negotiating to settle certain notes
payable and approximately $4,100,000 of litigation related accruals
at a discount or with the issuance of shares of either Vertex or
XeQute.
(vi) We entered into a Securities Purchase Agreement with four
accredited investors on April 28, 2004 for the sale of (i) $3,000,000
in convertible notes and (ii) warrants to purchase 3,000,000 shares
of our common stock and received proceeds of $1,500,000 from
such sale.
In conjunction with the sale of the convertible notes, we also
entered into a prelimary agreement with MidMark that would result in,
among other things, the conversion of substantially all of our
borrowings from MidMark into preferred and common stock and
warrants (see Note 5).
While we are continuing our efforts to reduce costs, increase
revenues, resolve lawsuits on favorable terms and settle certain
liabilities on a non-cash basis there is no assurance that we
will achieve these objectives. In addition, we will continue to
pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if such
financing is available, whether the terms or conditions
would be acceptable to us.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared on a basis that contemplates Vertex's continuation
as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. Such financial
statements do not include any adjustments, with the exception of the
provision to reduce the carrying values of the assets of the
subsidiaries in liquidation to their estimated net realizable value,
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should we be unable to continue as a going concern. If Vertex
fails to raise additional capital when needed, the lack of capital will
have a material adverse effect on Vertex's business, operating results,
financial condition and ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month
periods ended March 31, 2004 are not necessarily indicative of
the results that may be expected for the year ending
September 30, 2004.
12
The balance sheet at September 30, 2003 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003.
2. Sales or Divestitures of Non-Core Businesses
The Company developed and initiated a plan in the quarter ended June 30, 2002
that would result in the sale or divestiture of assets or closings of
businesses that are not part of the Company's current strategic plan or have
not achieved an acceptable level of operating results or cash flows. In
connection with this plan, the Company has completed the sale of certain
businesses and assets (see Note 3 in the 2003 Form 10-K). After being
unsuccessful in attempting to sell its five remaining European operations
(Vertex UK-previously PSS, Vertex Service and Maintenance Italy -
previously SIS, Vertex Italy, Euronet and Vertex France - previously ICS
France) and based on the continuing cash drain from these operations,
the respective boards of directors determined that in the best interest of
their shareholders that they would seek the protection of the respective
courts in each country, which have agreed to an orderly liquidation of
these companies for the benefit of their respective creditors. During the three
months ended March 31, 2004, the Company recognized a noncash gain from the
approval by creditors of the liquidation of the net liabilities of the Company's
U.K. subsidiary, as explained below. Accordingly, the remaining net assets and
retained liabilities of these businesses are classified as net liabilities
associated with subsidiaries in liquidation in the accompanying March 31, 2004
and September 30, 2003 condensed consolidated balance sheets. While the Company
expects the liquidation process to take through at least September 30, 2004,
significant variations may occur based on the complexity of the entity and
requirements of the respective country.
Retained liabilities are generally carried at their contractual or historical
amounts. The ultimate amounts required to settle these retained liabilities
will differ from estimates, based on contractual negotiations, and the outcome
of certain legal actions and liquidation proceedings.
The following is a summary of net assets and retained liabilities as of
March 31, 2004 and September 30, 2003:
March 31, September 30,
2004 2003
------------ -----------
Cash $ 201,117 $ 654,068
Receivables, net 1,169,520 990,468
Inventories, net 645,489 608,993
Accounts payable (2,273,720) (2,959,933)
Accrued liabilities (5,014,881) (5,207,546)
Deferred revenue (1,232,559) (1,186,486)
Loans payable - banks (1,138,513) (1,074,142)
Other liabilities - (336,499)
------------- -----------
Net liabilities associated with
subsidiaries in liquidation $(7,643,547) $(8,511,077)
============= ===========
13
The Company received notice that the liquidation of Vertex UK,
which was under liquidation as of December 31, 2003, has been approved
and finalized by the UK creditors as of January 5, 2004. Based on
such notice, management reduced the Company net liabilities associated
with subsidiaries in liquidation by approximately $1,400,000,
reclassed approximately $1,073,000 of translation loss from accumulated
other comprehensive loss to the consolidated statement of operations and
recognized a gain of approximately $320,000 in the second quarter
of fiscal 2004.
Except for the gain from the liquidation of the U.K. subsidary, the
results of operations of these businesses for the three and six months
ended March 31, 2004 and 2003 were not significant.
3. INVENTORIES
Inventories consist of raw materials of $475,305 and $537,337 at
March 31, 2004 and September 30, 2003, respectively, and were net of a
valuation allowance of $50,504 at those dates.
At March 31, 2004 and September 30, 2003, inventories of the European
operations in liquidation amounted to approximately $645,000 and $609,000,
respectively, and are presented on the balance sheets in net liabilities
associated with subsidiaries in liquidation.
4. NOTES PAYABLE TO UNRELATED PARTIES
Notes payable to unrelated parties consist of past due notes payable to the
following:
March 31, September 30,
2004 2003
--------- -----------
Renaissance Software, Inc. $1,227,500 $1,227,500
Divisions of Genicom International 375,000 375,000
Aryeh Trust 294,400 266,736
--------- ----------
$1,896,900 $1,869,236
========= ==========
The note payable to Aryeh Trust was repaid in April 2004. The other
notes remained unpaid as of April 30, 2004. For additional
information, see Note 5 below and Note 10 in the 2003 Form 10-K.
5. NOTES AND CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Notes and convertible notes payable to related parties consist of past due
or demand notes payable to MidMark as follows:
March 31, September 30,
2004 2003
----------- ------------
10% convertible notes $1,814,324 $ 1,814,324
Convertible loan note 480,000 480,000
Demand notes 3,701,900 3,701,900
Grid note 281,287 143,948
Bridge loan 250,000 250,000
----------- -------------
$6,527,511 $ 6,390,172
=========== =============
MidMark is a shareholder of the Company and certain
MidMark Managing Directors have served as directors
of the Company. In June 2001, November 2001 and again in
January 2002, the Company issued in the aggregate $5,500,000
of convertible notes payable to MidMark. These notes were
to automatically convert into shares of Vertex common stock
on the day that the Company obtained the requisite shareholder
approval for the issuance of shares upon conversion to MidMark.
In the event that shareholder approval was not obtained by
September 30, 2003, the principal amount plus any accrued interest
(at the prime rate) would become immediately due and payable. The
notes were to convert, subject to future events, into (i) Vertex
common stock at a future market price no higher than $1.31 per share
or (ii) 5,500 shares of Series "C" Preferred Stock, which were
convertible into 6,545,000 common shares at $0.84 per share. The
Company was required to register the underlying common shares.
In the event of a shareholder rejection, or prepayment prior to
shareholder approval, the interest rate on the notes would have
increased retroactively to 14%.
14
In March 2002, the Company agreed to amend the agreement related
to the $5,500,000 of convertible notes payable issued in June 2001.
The amendment removed both the requirement for shareholder approval
and the automatic conversion feature, and set the maturity date
for September 30, 2003. Concurrent with the amendment of these
notes, MidMark elected to convert approximately $782,000 of
principal and $218,000 of accrued interest into 997 shares of
Series "C" preferred stock. The remaining principal balance of the
convertible notes payable of $4,718,717 and accrued interest at prime
were convertible into Series "C" preferred shares at a conversion
price of $1,000 per share. The Series "C" preferred shares in turn were
convertible into shares of common stock at $0.84 per share.
In November 2001, the Company issued $3,000,000 of
10% convertible notes payable, with an original maturity date of
September 30, 2003, to MidMark that would have been convertible
into 3,000 shares of Vertex Series "C" Preferred Stock at the
option of MidMark on the day that the Company obtained the
requisite shareholder approval for the issuance of Series "C"
Preferred Stock upon conversion to MidMark. MidMark could have
converted the Series "C" Preferred Shares into 3,570,026 shares of
Vertex common stock at $0.84 per share. The Company was required to
register the underlying common shares. In the event of a
shareholder rejection, or prepayment prior to shareholder
approval, the interest rate on the notes would have increased
retroactively to 14%.
On August 9, 2002, the remaining principal balance of $4,718,717
of the convertible notes and $1,185,176 of the $3,000,000 of 10%
convertible notes were fully settled in connection with the sale
of the Company's French based advanced planning software business
to MidMark. The remaining $1,814,324 of past due 10% convertible
notes payable at March 31, 2004 and September 30, 2003 are
convertible at $0.84 per share and collateralized by all tangible
and intangible property of the Company.
In December 2002, XeQute received an additional $480,000 from
MidMark under a Convertible Loan Note with terms similar to the 10%
convertible note payable described above. The Convertible Loan Note
would have automatically converted into Non-Voting Shares of XeQute
PLC at $0.672 per share when a minimum subscription of
$480,000 of a proposed but now aborted private placement had
been reached.
The conversion rates of all of the above MidMark notes are
subject to certain antidilution provisions.
The Company borrowed an additional $2,588,900 during the year ended
September 30, 2002, and an additional $1,113,000 (including $425,000
restricted for usage on XeQute obligations) during the year ended
September 30, 2003, from MidMark under nonconvertible notes that are
payable on demand, bear interest at 10% per annum and are secured
by the same collateral in which the Company previously granted a
security interest to MidMark under the agreement related to the
convertible notes payable described above.
15
During October 2002, Vertex also executed a Grid Note which
provides for up to $1,000,000 of availability from MidMark.
This note will be funded by the proceeds, if any, from the
sale of any shares of Vertex common stock held by MidMark.
This note is payable on demand, carries interest at the rate of
10% per annum and is secured by the same collateral in which the
Company previously granted a security interest to MidMark under the
agreement related to the convertible notes payable described above.
In consideration of MidMark providing this facility, the Company
agreed to issue warrants to purchase a number of unregistered
shares equal to 120% of the number of tradeable shares sold by
MidMark to fund such note, at a purchase price per share equal to
80% of the price per share realized in the sale of shares to fund
the Grid Note. As of March 31, 2004, the Company had borrowed
$281,287 under this arrangement. As a result of the borrowings through
March 31, 2004, the Company was obligated to issue to MidMark warrants
to purchase 5,569,980 shares of common stock at an exercise price of
$0.05 per share. The aggregate estimated fair value of the warrants at
the respective dates of issuance was $54,000 which was determined using
the Black-Scholes option pricing model and recorded as a charge to
interest expense, with an offsetting increase in additional paid-in
capital, during the six months ended March 31, 2004. In applying
the Black-Scholes option pricing model, the Company used the following
assumptions: expected dividend yield - 0%; expected stock price
volatility - 142%; risk-free interest rate - 3.50%; and expected life
of the warrants - three months.
In December 2002, Vertex, through XeQute PLC, closed a $500,000 Bridge Loan
arranged by CSS whereby it borrowed $250,000 from both MidMark and Aryeh
Trust, an unrelated party. Originally, the Bridge Loans were to be repaid
with proceeds from a proposed private placement funding. The Bridge Loans
matured on June 9, 2003. The Company has agreed to continue paying interest
at the original rate of 3% per month, with the principal to be repaid when
funds become available. The Bridge Loans are secured by a first security
interest in all of the assets of XeQute. The lenders were each granted
warrants to purchase shares of XeQute PLC as part of the consideration for
this loan. The interest charge relating to the fair value of these warrants
was not material and was recognized over the original term of the Loan.
Upon the receipt of the minimum subscription amount for a private placement
by XeQute PLC, MidMark has agreed to relinquish its security interest in the
assets of XeQute, in exchange for warrants to purchase 250,000 common shares
of XeQute PLC which are presently owned by Vertex. MidMark has agreed that it
will vote any shares which it may acquire through the exercise of the warrant
in accordance with the directions of Vertex. However, it will retain its
security interest in the shares of XeQute PLC owned by Vertex and in all of
the assets of Vertex.
Vertex entered into a Securities Purchase Agreement with four
accredited investors on April 28, 2004 for the private placement
(the "Private Placement") of (i) $3,000,000 in convertible notes
(the "Convertible Notes") and (ii) warrants (the "Warrants") to purchase
3,000,000 shares of our common stock. The investors are obligated to provide
us with an aggregate of $3,000,000 as follows: $1,500,000 which was provided
to us on April 28, 2004; $750,000 which will be provided to us within five
business days of the filing of a registration statement under the Securities
Act of 1933 for the registration of the shares issuable upon the conversion
of the Convertible Notes and the exercise of the Warrants to
purchase 3,000,000 shares; and $750,000 which will be provided to us
within five business days of the effective date of the registration
statement.
The Convertible Notes bear interest at 10%, mature two years from the date
of issuance, and will be convertible into our common stock, at the investors'
option, at the lower of: $0.30; or 60% of the average of the three lowest
intraday trading prices for the common stock on a principal market for
the 20 trading days before but not including the conversion date. The full
principal amount of the Convertible Notes would become due upon any default
under the terms of Convertible Notes. The Warrants are exercisable until
five years from the date of issuance at a purchase price of $0.11
per share. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property
and registration rights. Since the conversion price will be less than the
market price of the common stock at the time of the Convertible Notes are
issued, it is anticipated that the Company will recognize a charge during
the third quarter of fiscal 2004 relating to the beneficial conversion
feature of the Convertible Notes.
In connection with the Private Placement of the Convertible Notes and
Warrants as described above, MidMark and Vertex have agreed,
subject to the execution of mutually acceptable documentation, that:
1. All warrants held by MidMark for the purchase of the common stock
of Vertex shall be exercised by applying the $281,287 owed by Vertex to
MidMark under the Grid Note at March 31, 2004, as described above, in
complete satisfaction of the exercise price for such warrants.
2. The warrants held by MidMark for 60,000 shares of XeQute Solutions, PLC
shall be converted into a warrant for 240,000 shares of common stock of
Vertex, exercisable at $0.01 per share, and shall be exercised by reducing
the amount of indebtedness owed by the Company to MidMark.
3. Upon the authorization of a series of convertible preferred shares of
Vertex (Series "D") providing for a liquidation preference equal to the
amount paid for such shares together with a 10% per annum return and
conversion rights at least as favorable as the conversion rights under the
Convertible Notes, MidMark will convert all indebtedness owed to MidMark by
Vertex or its subsidiaries, which indebtedness is not applied to the
exercise price of the Warrants held by MidMark as set forth above, to the
Series "D" preferred stock.
4. The conversion terms of the existing Series "C" preferred stock of
Vertex held by MidMark shall be amended to provide conversion rights at
least as favorable as the conversion rights under the Convertible Notes.
5. Vertex and MidMark shall enter into a Redemption Agreement providing
for the redemption of such Series "D" preferred stock as may be redeemed
for payment of an amount equal to the sum of (1) the unpaid balance then
due to MidMark under the Bridge Loan and (2) $250,000; which redemption
shall occur upon the earlier of (x) December 31, 2004, or (y) the receipt
by Vertex of any tax refund, which refund is expected in the third quarter
of fiscal year 2004.
6. Vertex will provide registration rights to MidMark with
respect to any unregistered shares of common stock of Vertex identical
to those provided under the terms of the Private Placement. In furtherance
of this, MidMark will, under the terms of a customary lock-up agreement,
agree not to sell any shares of common stock until the earlier of (x)
one year after the effective date of the registration statement or (y) the
sale by the Private Placement investors of common stock which in the
aggregate exceeds two thirds (as determined by value) of the common stock
received by the Private Placement investors in connection with the exercise
of their conversion rights under the Convertible Notes.
A portion of the proceeds of the Private Placement was used to repay the
balance of the note payable to Aryeh Trust ($294,400 as of March 31,
2004--see Note 4). Upon the execution of mutually acceptable documentation
by MidMark and the Company, the balance of the Company's obligations to
MidMark, which totaled $6,527,511 as of March 31, 2004 as shown in the
table above, will be converted to Series "D" preferred stock or warrants.
16
6. STOCKHOLDERS' DEFICIENCY
Effective July 31, 2003, the Company completed the sale of 10,000,000
shares of its common stock, which had a fair market value at that time of
approximately $400,000, to AMC. Payment for this purchase by AMC was in the
form of cash equivalent trade credits with a face value of $4,000,000, which
the Company can use or sell to others for the purchase of merchandise and
services. The face value is not necessarily indicative of the ultimate fair
value or settlement value of the trade credits. Any trade credits not
utilized by June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year. The trade credits were valued
at the fair market value of the shares issued by the Company of $400,000 and
classified as unearned income, which is a separate component of stockholders'
deficiency in the accompanying condensed consolidated balance sheets as of
March 31, 2004 and September 30, 2003. The unearned credits will be offset
as the trade credits are used.
In addition, the Company agreed to loan AMC $150,000 of which
$10,000 was delivered at closing; $40,000 was delivered in
August 2003; $50,000 was to be delivered by September 10, 2003
and $50,000 was to be delivered by October 10, 2003. The
Company did not make the September or October payments. This
loan will be repaid exclusively from funds received from the
sale by AMC of its 10,000,000 shares of the Company's Common Stock.
The Company is required to register these shares within six months
of the closing.
17
Preferred Stock
Series "A"
The Company has issued 1,356,852 shares of Series "A" Preferred Stock. Each
outstanding share of Series "A" Preferred Stock is convertible at any time,
at the option of the holder, into common stock on a one for one basis.
All of the common shares issuable on conversion of the Series "A" Preferred
Stock must be registered by the Company.
Series "B"
The Company raised $1,000,000 in cash through the issuance and sale of
1,000 shares of Series "B" Convertible Preferred Stock, with each share
of Series "B" Preferred being convertible at any time into 1,190 shares
of common stock at a price of $0.84 per share. The Company must
register all of the common shares issuable on conversion of the Series
"B" Preferred Stock.
Series "C"
In March 2002, the Company issued 997 shares of Series "C"
Convertible Preferred Stock to MidMark upon conversion of approximately
$997,000 of convertible notes payable and accrued interest.
Each outstanding share of Series "C" Preferred is convertible at any time
into 1,190 shares of common stock at a price of $0.84 per share. The Company
must register all of the common shares issuable on conversion of the
Series "C" Preferred Stock.
All of the preferred stockholders are entitled to vote their shares as though
such conversion had taken place. In addition, preferred stockholders are not
entitled to preferred dividends, but are entitled to their pro rata share
of dividends, if any, declared on common stock under the assumption that a
conversion to common stock had occurred.
Pro Forma and Other Disclosures Related to Stock Options
As of September 30, 2003, the Company had granted options to purchase a total
of 7,597,106 shares of common stock. No options were granted and options to
purchase 155,000 and 330,000 shares were cancelled during the three and six
months ended March 31, 2004, respectively.
As further explained in Note 13 in the 2003 Form 10-K, as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" the Company accounts for its stock option plans
using the intrinsic value method under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, it
does not recognize compensation cost for options with exercise prices at or
above fair market value on the date of grant and, instead, it is required by
SFAS 123 and SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" to make pro forma disclosures of net income (loss) and earnings
(loss) per share as if the fair value based method of accounting under SFAS 123
had been applied. The Company did not grant any stock options to employees
during the six months ended March 31, 2004 and 2003; however, it did grant
options to employees in prior periods. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the grant
date and had amortized the cost over the vesting period pursuant to SFAS 123,
net loss and loss per share would have been increased to the pro forma amounts
indicated in the table below:
Three Months Ended March 31 Six Months Ended March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
-------------- ------------ ------------ --------------
Net loss-as reported $ (186,634) $(863,755) $ (844,834) $(1,823,845)
Deduct total stock -
based employee compensation
expense determined under a
fair value based method for
all awards, net of related
tax effects (247,621) (247,893) (495,307) (495,975)
------------- ------------- ------------ ------------
Net loss - pro-forma $ (434,255) $(1,111,648) $(1,340,141) $(2,319,820)
============= ============= ============ ============
Loss per share - as reported $ (.00) $(.02) $(.02) $(.05)
Loss per share - pro-forma $ (.01) $(.03) $(.03) $(.06)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model (see Note 13 in the 2003 Form 10-K as
tothe assumptions used in prior periods).
18
7. EARNINGS (LOSS) PER SHARE
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of SFAS 128,
"Earnings per Share". Basic earnings (loss) per shares is calculated by
dividing net income or loss (there are no dividend requirements on the
Company's outstanding preferred stock) by the weighted average number of
common shares outstanding during each period.
The calculation of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, such as those issuable upon
the exercise of stock options and warrants and the conversion of convertible
securities, were issued during the period and appropriate adjustments were
made for the application of the treasury stock method and the elimination
of interest and other charges related to convertible securities.
As of March 31, 2004, there were 18,571,878 shares of common stock
potentially issuable upon the exercise of stock options (7,267,106 shares),
warrants (5,569,980 shares) and the conversion of convertible securities
(5,893,192 shares). However, diluted per share amounts have not been
presented in the accompanying condensed consolidated statements of operations
because the Company had a net loss for the three and six months ended March 31,
2004 and 2003, and the assumed effects of the exercise of all of the Company's
outstanding stock options and warrants and the conversion of all of its
convertible securities would have been anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
We are party to a number of claims, which have been previously
disclosed by the Company, and claims by vendors, landlords and
other service providers seeking payment of balances owed. Since
such amounts have already been recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme
Court of the State of New York, County of Suffolk, entitled
Bautista v. Vertex Interactive, Inc and Renaissance Software,
Inc. The action, which demands $394,000, is brought by a former
employee claiming breach of his employment agreement. On March
29, 2004, a judegment was granted against the Company in the
amount of $350,482.
b) On October 31, 2001, an action was commenced in the United
States District Court, Southern District of New York entitled
Edgewater Private Equity Fund II, L.P. et al. v. Renaissance
Software, Inc. et al. The action, brought against Renaissance
Software, Inc., a subsidiary of Vertex, and Vertex, alleged the
default by Renaissance Software, Inc. in payment of certain
promissory notes in the principal aggregate sum of $1,227,500.
Vertex guaranteed the notes. The noteholders demanded $1,227,500,
together with interest accruing at the rate of 8% per annum from
June 30, 2001. On March 12, 2002, the noteholders were successful
in obtaining a judgment against Renaissance Software, Inc. in the
aggregate amount of $1,271,407 including interest, late charges and
attorneys' fees. However given the Company's current cash position,
we have been unable to pay the judgment and have been pursuing
non cash alternatives.
19
c) As part of the settlement entered into between the Company
and three former principals of a company acquired by Vertex in
2000, consent judgments in the amount of approximately
$1,000,000 each were entered against Vertex on July 19, 2002.
The incremental liability has been included in other expense
(provision for litigation) for the three months ended December 31,
2002. The Company is currently negotiating with the former owners to
accept forms of payment other than cash. However, there can be no
assurance that a non-cash settlement will be concluded.
In July 2002, the former owners obtained a court levy upon
several of the Company's bank accounts, placing a hold on
approximately $70,000 of the Company's funds. The Company,
together with its secured lenders, objected to the turnover
of these funds, however a turnover order was granted by the
court in October 2002.
20
d) On June 25, 2003, an action was commenced in the United
States District Court, District of New Jersey, entitled CPG
International, N.V. vs. Vertex Interactive, Inc. The action,
which demands $406,342, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business. On March 3, 2004, the action was settled for the sum
of $125,000 which was paid on April 30, 2004.
e) On February 9, 2003, in the matter captioned Scansource,
Inc. vs. Vertex Interactive, Inc., Superior Court of New Jersey,
Esses County, a judgment was granted against the Company in the
amount of $142,155. The action alleged non payment the the
Company for computer hardware.
21
PAYROLL OBLIGATIONS
As a result of its severe cash constraints (see Note 1 -
Going Concern section), the Company had fallen as much as two to
three months behind in meeting its payroll obligations to its
employees subsequent to September 30, 2002. The Company has
been meeting its current payroll obligations, and has attempted
to pay overdue employee payroll obligations as cash resources
become available. However, in a letter dated April 3, 2003
the New Jersey Department of Labor (N.J.D.O.L.) has assessed
the Company a penalty of $154,000 for failure to pay payroll
on a timely basis. The Company entered into Consent Order and
Agreement with the N.J.D.O.L. to pay down this obligation,
starting with an initial payment on April 30, 2004 of $18,000,
which the Company has made, and then monthly payments of $30,000
starting on June 1, 2004, until the balance of the payroll
obligations are paid.
In addition, a number of former employees of a California
based division of Vertex had filed claims with the California
Department of Labor for non payment of wages for the second
half of July 2002; the final payroll prior to the closing of
the division. The Company had disputed the claims, primarily
on the basis of the lack of documentation for hours worked
during the period. However in July 2003, these claims were
heard by the California DOL and the amounts claimed, together
with interest and penalties aggregating approximately $100,000
which remain unpaid as of March 31, 2004, were granted to
these former employees.
22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains, in addition to
historical information, certain forward-looking statements that
involve significant risks and uncertainties. Such forward-looking
statements are based on management's belief, as well as
assumptions made by and information currently available to,
management pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein and in
Item 1: "Business", included in our Annual Report on Form 10-K
for the year ended September 30, 2003. Vertex undertakes no
obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect
events or circumstances after the date of this Quarterly Report
or to reflect the occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements and
related notes of the Company contained elsewhere in this report.
In this discussion, the years "2004" and "2003" refer to the three
and six months ended March 31, 2004 and 2003, respectively.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent assets and liabilities.
Management bases its estimates and judgments on historical
experience and on various other factors 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.
Management continuously evaluates its estimates and judgments,
and actual results may differ from these estimates under different
assumptions or conditions.
Those estimates and judgments that were most critical to the
preparation of the financial statements involved the allowance
for doubtful accounts, inventory reserves, recoverability of
intangible assets and the estimation of the net liabilities
associated with subsidiaries in liquidation as further explained
in the Company's Annual Report on Form 10-K for the year ended
September 30, 2003.
Results of Operations
Three months ended March 31, 2004 ("2004") compared to the three
months ended March 31, 2003 ("2003").
Operating Revenues:
Operating revenues decreased by approximately $657,000 (or
55.9%) from approximately $1,175,000 in 2003 to approximately
$518,000 in 2004.
Revenues were negatively impacted by the continued weak demand in its
key markets, exacerbated by the Company's lack of financial resources.
23
Products and Services
Sales to external customers by the two significant
product and service line groupings for the three months
ended March 31, 2004 and 2003 (in thousands) are as
follows:
2004 2003
--------- ---------
Enterprise Solutions $ 0 $ 84
Service, Maintenance and Other 518 1,091
--------- ---------
$ 518 $1,175
========= =========
There were no Enterprise Solutions revenues during the period mainly due
to a lack of warehouse expansions by customers.
Service, maintenance and other revenues have decreased approximately
$573,000 from 2003. The decrease was a result of our strategy of
de-emphasizing lower margin product sales, together with the impact
of the downturn in the economy, especially post-September 11.
Gross Profit:
Gross profit decreased by approximately $363,000 (or 56.3%)
to $282,000 in 2004. As a percent of operating revenues,
gross profit was 54.5% in 2004 as compared to 54.9% in 2003. The
gross profit was negatively impacted by a lower volume of sales.
Operating Expenses:
Selling and administrative expenses decreased approximately
$740,000 (or 59.5%) from approximately $1,244,000 in 2003 to $504,000
in 2004. During 2004 we continued various cost reduction measures,
including reduction in the number of our employees, facilities
consolidations, as well as reductions in other expenses deemed redundant
such as marketing and advertising and other headcount-related expenses.
There were no research and development expenses ("R&D").
As a result of the slow economy and our cost cutting efforts,
we suspended R&D, focusing our technical resources on
maintenance services.
The decrease in depreciation and amortization expense to approximately
$40,000 in 2004, as compared to approximately $66,000 in 2003, is the
result of certain assets becoming fully depreciated.
24
Interest expense increased by approximately $32,000 to
$235,000 in 2004. This increase is due to increased
borrowings.
Other income increased mainly due to the $320,000 gain on liquidation of
the UK operations.
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
The net loss for the period decreased approximately $677,000 or 78.4% to
approximately $187,000 from $864,000 in 2003, mainly due to the factors
mentioned above.
Results of Operations
Six months ended March 31, 2004 ("2004") compared to the six
months ended March 31, 2003 ("2003").
Operating Revenues:
Operating revenues decreased by approximately $1,107,000 (or
45.0%) from approximately $2,457,000 in 2003 to approximately
$1,350,000 in 2004.
Revenues were negatively impacted by the asset sales or disposals
of all of the Company's European businesses and certain of its
non-core US operations as well as continued weak demand in its
key markets; exacerbated by the Company's lack of financial
condition.
Products and Services
Sales to external customers by the two significant
product and service line groupings for the six months
ended March 31, 2004 and 2003 (in thousands) are as
follows:
March 31
---------------------------
2004 2003
---------- ----------
Enterprise Solutions $ 84 $ 434
Service and Maintenance 1,266 2,023
-------- --------
$ 1,350 $ 2,457
======== ========
Enterprise solutions revenues decreased to $84,000 in 2004
from $434,000 in 2003. The decrease was a result of our
decision to sell and/or liquidate all of our European operations,
our strategy of de-emphasizing lower margin product sales, together
with the impact of the downturn in the economy, especially
post-September 11.
Service and maintenance revenues have decreased approximately
$757,000 from 2003. The decrease was a result of our decision
to sell and/or liquidate all of our European operations, our strategy
of de-emphasizing lower margin product sales, together with the
impact of the downturn in the economy, especially post-September 11.
24
Gross Profit:
Gross profit decreased by approximately $713,000 (or 55.4%)
to $574,000 in 2004. As a percent of operating revenues,
gross profit was 42.5% in 2004 as compared to 52.4% in 2003. The
gross profit percentage was unfavorably impacted by a smaller
percentage of higher margin service and maintenance revenues.
Operating Expenses:
Selling and administrative expenses decreased approximately
$1,500,000 (or 57.6%) from approximately $2,604,000 in 2003 to
approximately to $1,104,000 in 2004. During 2003 we continued
various cost reduction measures, including reduction in the
number of our employees, facilities consolidations, as well
as reductions in other expenses deemed redundant such as
marketing and advertising and other headcount-related expenses.
The decrease in the depreciation and amortization expense to
$83,000 in 2004, as compared to approximately $138,000 in 2003,
is the direct result of three factors: (i) the write-off of
intangible assets in the fourth quarter of fiscal 2001, based
on an assessment of the fair market value of these assets as of
September 30, 2001; (ii) the adoption of SFAS 142 as of
October 1, 2001, which substantially reduced the intangibles
that are to be amortized in the future. These intangibles were
being amortized over their estimated lives ranging from 2 to
25 years and (iii) certain assets becoming fully depreciated.
Interest expense increased by approximately $146,000 to
$514,000 in 2004. This increase is due to increased
borrowings and a $54,000 charge related to warrants issued
MidMark (see Note 5).
Other income increased mainly due to the $320,000 gain on
liquidation of the UK operations.
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
The net loss for the period decreased approximately $979,000 or
53.7% to approximately $845,000 from $1,824,000 in 2003 mainly
due to the factors mentioned above.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency
($31,923,000) and stockholders' deficiency ($31,709,000) at
March 31, 2004, our current rate of cash consumption, the
uncertainty of liquidity- related initiatives described in detail
below, and the reasonable possibility of on-going negative impacts
on our operations from the overall economic environment for a
further unknown period of time, there is substantial doubt as to
our ability to continue as a going concern.
The successful implementation of our business plan has required,
and will require on a going forward basis, substantial funds
to finance (i) continuing operations, (ii) further development
of our enterprise software technologies, (iii) settlement of
existing liabilities including past due payroll obligations to
its employees, officers and directors, and (iv) possible
selective acquisitions to achieve the scale we believe will be
necessary to remain competitive in the global SCM industry.
There can be no assurance that we will be successful in raising
the necessary funds.
Fiscal 2004:
Outlook
In light of current improving economic conditions and the
upswing in the economy we may now anticipate reaching the point
at which we generate cash in excess of our operating expenses in
the quarter ending June 30, 2004, about which there can be no
assurance. However, the Company has accrued significant
obligations during the past several years and to the extent we
cannot settle existing obligations in stock or defer our
obligations until we generate sufficient operating cash, we
will require significant additional funds to meet accrued
non-operating obligations, working capital to fund operating
losses, if required, to pay short-term debt and related interest,
capital expenditures, expenses related to cost-reduction initiatives,
and potential liabilities that could arise from litigation claims
and judgments.
Our sources of ongoing liquidity include the cash flows of
our operations, potential new credit facilities, and
potential additional equity investments. Consequently,
Vertex continues to aggressively pursue additional debt
and equity financing, the restructuring of certain existing
debt obligations and the reduction of its operating expenses.
In addition, Vertex has structured its overall operations and
resources around high margin enterprise products and services.
However, in order to remain in business, the Company must raise
additional cash in a timely fashion.
25
The following initiatives related to raising the required funds, settling
liabilities and/or reducing expenses have been completed or are in process:
(i) As of March 31, 2004, the Company had borrowed approximately $6,528,000
from MidMark, a Company that owns shares of Vertex's preferred and
common stock (See Note 5). MidMark Capital L.P. and its affiliate, MidMark
Capital II, L.P., and certain individuals related to these two entities,
are referred to collectively as "MidMark".
Included in the aforementioned amount payable to MidMark is $281,287
which has been borrowed under a Grid Note which provides for up to
$1,000,000 of availability from MidMark. This note will be funded by
the proceeds, if any, from the sale of any shares of Vertex common stock
held by MidMark (see Note 5).
(ii) The Company completed the sale of certain entities and
assets during fiscal 2002. After being unsuccessful in attempting
to sell its five remaining European operations, and based
on the continuing cash drain from these operations, during fiscal 2002
the respective boards of directors determined that in the best interest
of their shareholders that they would seek the protection of the
respective courts in each country, which have agreed to an
orderly liquidation of these companies for the benefit of their
respective creditors. During the three months ended March 31, 2004
we recognized a noncash gain of $320,000 from the approval by
creditors of the liquidation of the net liabilities of the Company's
U.K. subsidiary (see Note 2). Upon legal resolution of the approximately
$7,644,000 of net liabilities of the remaining European entities
as of March 31, 2004 we expect to recognize a non-cash gain (without any
significant cash outlay); however, the amount and timing of such gain
and cash outlay, if any, is totally dependent upon the decisions
to be issued by the respective court appointed liquidators.
(iii) We have continued to reduce headcount (to approximately 20
employees in our continuing North American business at March
31, 2003, of whom 5 were furloughed until additional funds are raised),
consolidate facilities and generally reduce costs.
26
(iv) Effective July 31, 2003, the Company completed the sale of
10,000,000 shares of its common stock, which had an estimated fair
market value at that time of approximately $400,000, to American
Marketing Complex, Inc. ("AMC")(see Note 6). Payment for this purchase
was in the form of cash equivalent trade credits with a face value of
$4,000,000, which the Company can utilize for the purchase of
merchandise and services. The face value is not necessarily
indicative of the ultimate fair value or settlement value of the
cash equivalent trade credits. Any trade credits not utilized by
June 30, 2008 shall expire, unless the Company exercises an
option to extend the agreement for one year.
(v) We are seeking to settle certain of our current liabilities
through non-cash transactions. Vertex is negotiating with vendors
to settle balances at substantial discounts, including through
the use of the cash equivalent trade credits set forth in (v)
above. In addition, we are negotiating to settle certain notes
payable and approximately $4,100,000 of litigation related accruals
at a discount or with the issuance of shares of either Vertex or
XeQute.
(vi) Vertex entered into a Securities Purchase Agreement with four
accredited investors on April 28, 2004 for the private placement
(the "Private Placement") of (i) $3,000,000 in convertible notes
(the "Convertible Notes") and (ii) warrants (the "Warrants") to purchase
3,000,000 shares of our common stock. The investors are obligated to provide
us with an aggregate of $3,000,000 as follows: $1,500,000 which was provided
to us on April 28, 2004; $750,000 which will be provided to us within five
business days of the filing of a registration statement under the Securities
Act of 1933 for the registration of the shares issuable upon the conversion
of the Convertible Notes and the exercise of the Warrants to
purchase 3,000,000 shares; and $750,000 which will be provided to us
within five business days of the effective date of the registration
statement.
The Convertible Notes bear interest at 10%, mature two years from the date
of issuance, and will be convertible into our common stock, at the investors'
option, at the lower of: $0.30; or 60% of the average of the three lowest
intraday trading prices for the common stock on a principal market for
the 20 trading days before but not including the conversion date. The full
principal amount of the Convertible Notes would become due upon any default
under the terms of Convertible Notes. The Warrants are exercisable until
five years from the date of issuance at a purchase price of $0.11
per share. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property
and registration rights. Since the conversion price will be less than the
market price of the common stock at the time of the Convertible Notes are
issued, it is anticipated that the Company will recognize a charge during
the third quarter of fiscal 2004 relating to the beneficial conversion
feature of the Convertible Notes.
(vii) In connection with the Private Placement of the Convertible Notes
and Warrants as described above, MidMark and Vertex have agreed,
subject to the execution of mutually acceptable documentation, that:
1. All warrants held by MidMark for the purchase of the common stock
of Vertex shall be exercised by applying the $281,287 owed by Vertex to
MidMark under the Grid Note at March 31, 2004, as described above, in
complete satisfaction of the exercise price for such warrants.
2. The warrants held by MidMark for 60,000 shares of XeQute Solutions, PLC
shall be converted into a warrant for 240,000 shares of common stock of
Vertex, exercisable at $0.01 per share, and shall be exercised by reducing
the amount of indebtedness owed by the Company to MidMark.
3. Upon the authorization of a series of convertible preferred shares of
Vertex (Series "D") providing for a liquidation preference equal to the
amount paid for such shares together with a 10% per annum return and
conversion rights at least as favorable as the conversion rights under the
Convertible Notes, MidMark will convert all indebtedness owed to MidMark by
Vertex or its subsidiaries, which indebtedness is not applied to the
exercise price of the Warrants held by MidMark as set forth above, to the
Series "D" preferred stock.
4. The conversion terms of the existing Series "C" preferred stock of
Vertex held by MidMark shall be amended to provide conversion rights at
least as favorable as the conversion rights under the Convertible Notes.
5. Vertex and MidMark shall enter into a Redemption Agreement providing
for the redemption of such Series "D" preferred stock as may be redeemed
for payment of an amount equal to the sum of (1) the unpaid balance then
due to MidMark under the Bridge Loan and (2) $250,000; which redemption
shall occur upon the earlier of (x) December 31, 2004, or (y) the receipt
by Vertex of any tax refund, which refund is expected in the third quarter
of fiscal year 2004.
6. Vertex will provide registration rights to MidMark with
respect to any unregistered shares of common stock of Vertex identical
to those provided under the terms of the Private Placement. In furtherance
of this, MidMark will, under the terms of a customary lock-up agreement,
agree not to sell any shares of common stock until the earlier of (x)
one year after the effective date of the registration statement or (y) the
sale by the Private Placement investors of common stock which in the
aggregate exceeds two thirds (as determined by value) of the common stock
received by the Private Placement investors in connection with the exercise
of their conversion rights under the Convertible Notes.
A portion of the proceeds of the Private Placement was used to repay the
balance of the note payable to Aryeh Trust ($294,400 as of March 31,
2004--see Note 4). Upon the execution of mutually acceptable documentation
by MidMark and the Company, the balance of the Company's obligations to
MidMark, which totaled $6,527,511 as of March 31, 2004 as shown in the
table above, will be converted to Series "D" preferred stock or warrants.
While we are continuing our efforts to reduce costs, increase
revenues, resolve lawsuits on favorable terms and settle certain
liabilities on a non-cash basis there is no assurance that we
will achieve these objectives. In addition, we will continue to
pursue strategic business combinations and opportunities to raise
both debt and equity financing. However, there can be no assurance
that we will be able to raise additional financing in the
timeframe necessary to meet our immediate cash needs, or if such
financing is available, whether the terms or conditions
would be acceptable to us.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the
Company due to adverse changes in market prices and rates.
The Company is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S.
dollar and currencies of the Company's subsidiaries in
Europe which are currently in liquidation. The Company does
not anticipate that near-term changes in exchange rates
will have a material impact on future earnings, fair values or
cash flow of the Company, especially now that all of the
European operations have been either sold or placed into
liquidation. However, there can be no assurance that a sudden and
significant change in the value of European currencies would not
have a material adverse effect on the Company's financial
condition and results of operations.
The Company's short-term debt bears interest at variable
rates; therefore, the Company's results of operations would only
be affected by interest rate changes to the short-term debt
outstanding. An immediate 10 percent change in interest rates
would not have a material effect on the Company's results of
operations over the next fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management,
including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operations
of our disclosure controls and procedures with respect to the
information generated for use in our reporting system. Based upon,
and as of the date of that evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
in the reports that we file or submit under the Securities
Exchange Act of 1934 are recorded, processed, summarized
and reported within the time periods specified by the Commissions'
rules and forms.
28
There was no change in our internal control over financial reporting
during the quarter ended March 31, 2004 that has materially
affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
It should be noted that our management, including our principal
executive officer and principal financial officer, does not expect
that our disclosure controls and procedures or internal controls
over financial reporting will prevent all error and all fraud. A
control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more
people, or by management override of controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
In November 2003, as part of the Company's ongoing efforts to
tighten internal controls and to streamline and improve the
timelines of reporting, the Company consolidated four separate
financial reporting systems onto a single financial reporting
system at XeQute. As a result, the Company has reduced the
manual consolidation procedures, involving four disparate
financial reporting systems, providing a significant improvement
in internal financial procedures and controls.
Going forward financial reporting and controls at the XeQute
level will be fully automated. As the system is refined and
improved, the Company expects to experience continued improvement
in the effectiveness of its internal financial procedures and
controls.
29
Part II Other Information.
Item 1. Legal Proceedings
We are party to a number of claims, which have been previously
disclosed by the Company, and claims by vendors, landlords and
other service providers seeking payment of balances owed. Since
such amounts have already been recorded in accounts payable or
accrued liabilities, these claims are not expected to have a
material affect on the stockholders' deficiency of the Company.
However, they could lead to involuntary bankruptcy proceedings.
a) On April 16, 2003, an action was commenced in the Supreme
Court of the State of New York, County of Suffolk, entitled
Bautista v. Vertex Interactive, Inc and Renaissance Software,
Inc. The action, which demands $394,000, is brought by a former
employee claiming breach of his employment agreement. On March 29,
2004 a judgment was granted against the Company in the amount
of $350,382.
b) On June 25, 2003, an action was commenced in the United
States District Court, District of New Jersey, entitled CPG
International, N.V. vs. Vertex Interactive, Inc. The action,
which demands $406,342, alleges the Company's breach of an
Asset Sale and Purchase Agreement pursuant to which the Company
acquired various assets related to CPG International's Service
business. On March 3, 2004, the action was settled for the sum
of $125,000 which was paid on April 30, 2004.
c) On or about March 22, 2004, an action against the Company and its
subsidiary Renaissance Software, Inc., was commenced in New York State
Supreme Court, Nassau County, captioned Great Oak LLC, v Vertex Interactive
Inc, et al.
The action, which demands $327,676, alleges 2 months rent totaling
$23,736,92 and an early termination of lease fee of $303,929 to be due
Great Oak LLC, the landlord of premises leased to Renaissance Software
LLC. The Company plans to vigorously defend the action.
d) On February 9, 2003, in the matter captioned Scansource, Inc. vs.
Vertex Interactive, Inc., Superior Court of New Jersey, Essex County,
a judgment was granted against the Company in the amount of $142,155.
The action alleged nonpayment by the Company for computer hardware.
31
Item 2.Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None this quarter
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange Act
of 1934, as amended
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14
and Rule 15d 14(a), promulgated under the Securities and Exchange Act
of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
(b) The following Reports on Form 8-K were filed
during the period:
None.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VERTEX INTERACTIVE, INC
Registrant
By: /s/ Nicholas R. Toms
Nicholas R. Toms
Chief Executive Officer
Chief Financial Officer
May 17, 2004
33