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 June 30, 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: 48,551,978 shares
outstanding as of August 16, 2004.
Preferred stock, Series "A", par value $.01 per share: 1,356,852
shares outstanding as of August 16, 2004.
Preferred stock, Series "B", par value $.01 per share: 1,000
shares outstanding as of August 16, 2004.
Preferred stock, Series "C-1", par value $.01 per share: 997 shares
outstanding as of August 16, 2004.
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3 - 4
June 30, 2004 (Unaudited) and September 30, 2003
Condensed Consolidated Statements of Operations 5
For the three and nine months ended
June 30, 2004 and 2003 (Unaudited)
Condensed Consolidated Statement of Changes in 6 - 7
Stockholders' Deficiency For the nine months
ended June 30, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows 8
For the nine months ended June 30, 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
June 30, September 30,
2004 2003
(Unaudited)
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents, $ 164,654 $ 25,265
Restricted Cash - short-term 225,000 -
Accounts receivable, less
allowance for doubtful accounts
of $456,358 at June 30, 2004
and September 30, 2003 198,225 639,208
Inventories, net of valuation allowance 414,231 537,337
Prepaid expenses and other current assets 22,921 20,103
------------ -----------
Total current assets 1,025,031 1,221,913
Equipment and improvements, net of
accumulated depreciation and
amortization of $1,351,779 at
June 30, 2004 and $1,320,152
at September 30, 2003 38,602 70,249
Capitalized software costs, net of accumulated
amortization of $318,331 at June 30, 2004 and
$231,513 at September 30, 2003 28,938 115,756
Restricted cash - long-term 193,750 -
Deferred financing costs,
net of accumulated amortization of $26,250 550,745 -
Other assets 111,270 111,273
------------ ------------
Total assets $ 1,948,336 $ 1,519,191
============ ============
See notes to condensed consolidated financial statements.
3
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
June 30, September 30,
2004 2003
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Notes payable - unrelated parties $1,227,500 $ 1,869,236
Notes payable - related parties 4,233,187 4,095,848
Convertible notes payable - related parties 2,294,324 2,294,324
Accounts payable 3,800,769 4,533,875
Net liabilities associated with subsidiaries
in liquidation 7,572,880 8,511,077
Payroll and related benefits accrual 2,063,721 2,622,354
Litigation related accruals 3,655,323 4,077,665
Other accrued expenses and liabilities 5,153,916 4,870,759
Deferred revenue 386,251 305,243
------------- -----------
Total current liabilities 30,387,871 33,180,381
Long term convertible notes payable -
unrelated parties 2,250,000 0
------------- -----------
Total liabilities 32,637,871 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 155,778,295 155,364,295
Unearned income (400,000) (400,000)
Accumulated deficit (184,588,430) (184,332,055)
Accumulated other comprehensive loss (1,666,760) (2,480,790)
Less: Treasury stock, 87,712 shares of
common stock (at cost) (67,240) (67,240)
------------- -------------
Total stockholders' deficiency (30,689,535) (31,661,190)
------------- -------------
Total liabilities and stockholders' deficiency $ 1,948,336 $ 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 June 30, For the nine Months Ended June 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
------------ -------------- --------------- ----------------
REVENUES 706,208 $1,007,793 $ 2,056,294 $3,464,482
COST OF SALES 339,110 623,407 1,114,825 1,792,863
-------------- ------------ --------------- --------------
GROSS PROFIT 367,098 384,386 941,469 1,671,619
-------------- ------------ --------------- --------------
OPERATING EXPENSES:
Selling and administrative 520,077 909,812 1,623,726 3,513,631
Depreciation and
amortization of intangibles 35,383 68,346 118,463 206,333
-------------- ------------ --------------- --------------
Total operating expenses 555,460 978,158 1,742,189 3,719,964
-------------- ------------ --------------- --------------
OPERATING LOSS (188,362) (593,772) (800,720) (2,048,345)
-------------- ------------ --------------- --------------
OTHER INCOME (EXPENSES):
Interest expense (266,381) (248,005) (780,687) (616,078)
Gain on liquidation
of foreign subsidiaries - - 320,951 -
Gain on settlements of
liabilities 1,042,939 - 1,042,939 -
Other 268 1,706 (38,858) 507
-------------- ----------- --------------- --------------
Net other income (expense) 776,826 (246,299) 544,345 (615,571)
-------------- ----------- --------------- --------------
NET INCOME (LOSS) $ 588,464 $ (840,071) $ (256,375) $(2,663,916)
============== ============ =============== ==============
Net incomeper
share of common stock:
Basic $.01 ($.02) ($.01) ($.07)
============== ============ =============== ==============
Diluted $.01 ($.02) ($.01) ($.07)
============== ============ =============== ==============
Weighted average number of
shares outstanding:
Basic 48,201,978 37,663,516 48,201,978 37,355,824
============== ============ =============== ==============
Diluted 60,147,292 37,663,516 48,201,978 37,355,824
============== ============ =============== ==============
See notes to condensed consolidated financial statements.
5
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED JUNE 30, 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)
Effects of issuance of warrants
with long-term convertible notes payable -
unrelated parties 360,000
Change in unrealized foreign
exchange translation gains/losses(A) - -
Reclassification into current period
earnings
---------- -------- ---------- -------- ------------
Balance June 30, 2004 1,358,849 $13,589 48,201,978 $241,011 $155,778,295
========== ======== ========== ======== ============
See notes to condensed consolidated financial statements.
6
VERTEX INTERACTIVE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED JUNE 30, 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
Effects of issuance of
warrants with long-term
convertible
notes payable -
unrelated parties 360,000
Net loss(A) (256,375) (256,375)
Change in unrealized foreign
exchange translation
gains/losses(A) (259,178) (259,178)
Reclassification into
current period
earnings 1,073,208 1,073,208
----------- -------------- ------------ --------- -------------
Balance June 30, 2004 $(400,000) $(184,588,430) $ (1,666,760) $(67,240) $(30,689,535)
=========== ============== ============ ========== =============
(A) Comprehensive (income)loss for the three and nine months ended June 30, 2004 totaled $(659,126)
and $515,553, respectively.
See notes to condensed consolidated financial statements.
7
VERTEX INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended June 30,
-----------------------------------
2004 2003
--------------- --------------
Cash Flows from Operating Activities:
- ------------------------------------
Net loss $(256,375) ($2,663,916)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 118,463 206,333
Charges to interest expense for warrants
issued with note payable - related parties 80,250 -
Gain on liquidation of foreign subsidiaries (320,951) -
Gain on settlements of liabilities (1,042,939) -
Common stock issued for services 40,000
Changes in assets and liabilities:
Restricted cash (418,750)
Accounts receivable, net 440,983 562,424
Inventories, net 123,106 372,855
Prepaid expenses and other current assets (2,818) 88,885
Other assets 19,732 36,692
Accounts payable 59,833 105,957
Accrued expenses and other liabilities (501,035) 649,153
Advances from customers - (343,547)
Deferred revenue 81,008 (753,215)
----------- -----------
Net cash used in operating activities (1,619,493) (1,698,379)
----------- -----------
Cash flows from investing activities - (2,780)
----------- ------------
Cash Flows from Financing Activities:
- -------------------------------------
Proceeds from notes and convertible notes payable -
related parties 137,339 1,632,931
Repayment of senior credit facility - (145,736)
Repayment of notes payable - unrelated parties (391,735)
Proceeds from long-term convertible notes payable -
unrelated parties 2,250,000 250,000
Deferred financing costs (236,722) -
----------- -----------
Net cash provided by financing activities 1,758,882 1,737,195
----------- -----------
Net increase in cash and cash equivalents 139,389 36,036
Cash and cash equivalents at beginning of period 25,265 74,016
----------- -----------
Cash and cash equivalents at end of period $164,654 $110,052
=========== ===========
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.
9
The Company's securities received approval to return to the
bulletin board for trading as of March 31, 2004. From February 17,
2003 to March 30, 2004, the Company's securities were quoted on the
Pink Sheets, under the symbol "VETXE".
Going Concern Matters
Based upon our substantial working capital deficiency and
stockholders' deficiency of approximately $29,363,000 and
$30,690,000 at June 30, 2004, respectively, our recurring losses,
our historic rate of cash consumption, the uncertainty arising
from our default on one 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 our obligations under
existing or possible litigation settlements 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.
10
Initiatives Completed or in Process:
The following initiatives related to raising the required funds,
settling liabilities and/or reducing expenses have been completed
recently or are in process:
(i) As of June 30, 2004, the Company had borrowed approximately
$6,528,000 from MidMark, a company that owns shares of Vertex's
preferred and common stock and has the ability to purchase a
majority interest in Vertex (See Note 6). 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 6).
(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 nine months
ended June 30, 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 $7,573,000 of net
liabilities of the remaining European entities as of June 30, 2004
we expect to recognize an additional non-cash gain (without any
significant cash outlays); however, the amount and timing of such
gain and cash outlays, 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 June 30,
2004, of whom 5 were furloughed until additional funds are
raised), consolidate facilities and generally reduce costs.
11
(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. No
trade credits had been utilized through June 30, 2004.
(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 $3,655,000 of litigation related accruals at a
discount or with the issuance of shares of either Vertex or
XeQute. During the six months ended June 30, 2004, we realized
net gains of $325,000 from settlements of liabilities totaling
$450,000 through payments of $125,000 in cash.
(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
$2,250,000 from such sale as of June 30, 2004 (see Note 5). The
balance of $750,000 was received on August 12, 2004.
In conjunction with the sale of the convertible notes, we also
entered into an 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 6).
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.
12
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 nine month periods
ended June 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending September 30, 2004.
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
13
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 second quarter of fiscal 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 June 30, 2004 and September 30, 2003 condensed
consolidated balance sheets. While the Company expects the
liquidation process to take through at least December 31, 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 June 30, 2004 and September 30, 2003:
June 30, September 30,
2004 2003
------------ -----------
Cash $ 198,709 $ 654,068
Receivables, net 1,158,769 990,468
Inventories, net 639,555 608,993
Accounts payable (2,251,073) (2,959,933)
Accrued liabilities (4,969,565) (5,207,546)
Deferred revenue (1,221,228) (1,186,486)
Loans payable - banks (1,128,047) (1,074,142)
Other liabilities - (336,499)
------------- -----------
Net liabilities associated with
subsidiaries in liquidation $(7,572,880) $(8,511,077)
============= ===========
14
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's 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. subsidiary,
the results of operations of these businesses for the three and
nine months ended June 30, 2004 and 2003 were not significant.
3. INVENTORIES
Inventories consist of raw materials of $414,231 and $537,337 at
June 30, 2004 and September 30, 2003, respectively, and were net
of a valuation allowance of $50,504 at those dates.
At June 30, 2004 and September 30, 2003, inventories of the
European operations in liquidation amounted to approximately
$639,600 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 classified as current liabilities
consist of past due notes payable to the following:
June 30, September 30,
2004 2003
--------- -----------
Renaissance Software, Inc. $1,227,500 $1,227,500
Divisions of Genicom International 0 375,000
Aryeh Trust 0 266,736
--------- ----------
$1,227,500 $1,869,236
========= ==========
15
The notes payable to Aryeh Trust and to Genicom International were
repaid in April 2004. The other note remained unpaid as of June
30, 2004. For additional information, see Note 6 below and Note 10
in the 2003 Form 10-K.
5. CONVERTIBLE NOTES PAYABLE - UNRELATED PARTIES
Non-current convertible notes payable to unrelated parties of
$2,225,000 at June 30, 2004 arose from loans under 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 were 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 was provided to us on May 28, 2004
; and $750,000 was provided to us on August 12, 2004.
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. The aggregate estimated fair
value of the warrants was $360,000 which was determined using the
Black Scholes option pricing model and recorded as deferred
financing cost with an offsetting increase in additional paid-in
capital, during the nine months ended June 30, 2004. In applying
the Black, Scholes option pricing model, the Company used the
following assumptions: expected dividend yield - 0%; expected
stock price volatility - 160%; risk-free interest rate - 3.5%; and
expected life of the warrants - five years. The deferred financing
cost will be amortized over the life of the loan.
A portion of the proceeds of the Private Placement was used to
repay the balance of the $294,400 note payable to Aryeh Trust.
16
6. 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:
June 30, September 30,
2004 2003
----------- ------------
10% convertible notes $1,814,324 $ 1,814,324
Convertible loan note 480,000 480,000
---------- ------------
Total convertible notes 2,294,324 2,294,324
---------- ------------
Demand notes 3,701,900 3,701,900
Grid note 281,287 143,948
Bridge loan 250,000 250,000
----------- -------------
Total notes payable 4,233,187 4,095,848
----------- -------------
$6,527,511 $ 6,390,172
=========== =============
MidMark is a shareholder of the Company and has the ability to
purchase a majority interest in the company through the conversion
of convertible preferred stock and the exercise of warrants (see Note 7).
Certain MidMark Managing Directors have served as directors of the
Company.
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 issued to MidMark from June 2001 through
January 2002 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 June 30, 2004 and September 30, 2003 are
convertible at $0.84 per share and collateralized by all tangible
and intangible property of the Company.
17
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 10% convertible notes payable described
above.
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 10% 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 June 30, 2004, the Company had
borrowed $281,287 under this arrangement. As a result of the
borrowings through June 30, 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 nine months ended June 30, 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.
18
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 loan from Aryeh Trust was repaid in April 2004(see
Note 4). 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 Loan from MidMark is
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.
In connection with the Private Placement of the Convertible Notes
and Warrants as described in Note 5, MidMark and Vertex entered
into an Investment Restructuring Agreement pursuant to which:
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 June 30, 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. Vertex authorized the issuance of Series "C-1" convertible
preferred stock and exchanged the 997 outstanding shares of Series
C preferred stock held by MidMark for Series C-1 preferred stock
on a 1:1 basis (see Note 7).
19
4. Vertex authorized the issuance of Series "D" convertible
preferred stock with a liquidation preference equal to the amount
paid for such shares by MidMark together with a 10% per annum
return and with conversion rights on the same terms as the
conversion rights for the Series C-1 preferred stock. MidMark
will convert all indebtedness owed to MidMark by Vertex or its
subsidiaries (which totaled $6,527,511 at June 30, 2004), 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 on or about the date on which Vertex's Certificate of
Incorporation is amended to increase the authorized shares of
common stock from 75,000,000 shares to 400,000,000 shares.
5. Vertex and MidMark entered into a Redemption Agreement providing
for the redemption of such class D preferred stock which may be
redeemed for payment of an amount equal to $504,713; which redemption
shall occur upon the earlier of (x) December 31, 2004, or (y) the
receipt by us of a tax refund, which refund is expected in the fourth
quarter of fiscal year 2004.
6. Vertex will provide registration rights to MidMark with respect
to any unregistered shares of common stock of Vertex. 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) August 9, 2005 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 (see Note 5).
20
7. STOCKHOLDERS' DEFICIENCY
Unearned Income
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 June 30, 2004 and September 30, 2003. The unearned
credits will be offset as the trade credits are used. No trade
credit had been utilized through June 30, 2004.
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.
Shares Issued for Services
On July 28, 2004, the Company issued 350,000 shares of common
stock for consulting services rendered.
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.
21
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" and Series "C-1"
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.
On June 25, 2004, in connection with an Investment Restructuring
Agreement, the holders of Series C convertible preferred stock
exchanged their 997 shares of Series C convertible preferred stock
for Series C-1 convertible preferred stock on a 1:1 basis. Each
share of Series C-1 convertible preferred stock is convertible into
$1,000 worth of our common stock, at the selling stockholders' option,
at the lower of (i) $0.30 or (ii) 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.
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.
22
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 42,650 and 372,650
shares were cancelled during the three and nine months ended
June 30, 2004.
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 nine months ended June 30, 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 incomeand income per share would have been
increased to the pro forma amounts indicated in the table below:
Three Months Ended June 30 Nine Months Ended June 30,
--------------------------------------------------
2004 2003 2004 2003
------------ ------------ --------- ----------
Net income-as reported $ 588,464 $(840,071) $ (256,375) $(2,663,916)
Deduct total stock -
based employee compensation
expense determined under a
fair value based method for
all awards, net of related
tax effects (246,111) (247,686) (741,418) (743,661)
-------- --------- --------- ---------
Net income (loss)
- pro-forma $ 342,353 $(1,087,757) $ (997,793) $(3,407,577)
============ ============ ============ ===========
Basic and diluted income
(loss) per share
- as reported $ .01 $(.02) $(.01) $(.07)
Basic and diluted
income (loss) per share
- pro-forma $ .01 $(.03) $(.02) $(.09)
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
to the assumptions used in prior periods).
23
8. 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 June 30, 2004, there were 20,937,628 shares of common stock
potentially issuable upon the exercise of stock options (7,224,456
shares), warrants (5,569,980 shares) and the conversion of
convertible securities (8,143,192 shares). However, diluted per
share amounts have not been presented in the accompanying
condensed consolidated statements of operations for the three
months ended June 30, 2003 and the nine months ended June
30, 2004 and 2003 because the Company had net losses 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
9. 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 judgment 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,
24
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.
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.
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, Essex
County, a judgment was granted against the Company in the amount
of $142,155. The action alleged non payment by the Company for
computer hardware.
f) On or about March 22, 2004, an action against Vertex and
Renaissance Software, Inc. was commenced in New York State
Supreme Court, Nassau County, captioned Great Oak LLC vs.
Vertex Interactive, Inc. et al. The action, which demands
$327,676, alleges two months rent totaling $23,737 and an early
termination fee of $303,939 to be due Great Oak LLC, the landlord
of premises leased to Renaissance Software LLC. We vigorously
contest the allegations and anticipate defending the case vigorously.
25
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, which the
Company has made, 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 June
30, 2004, were granted to these former employees.
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.
26
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 nine months ended June 30, 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 June 30, 2004 ("2004") compared to the three
months ended June 30, 2003 ("2003").
Operating Revenues:
Operating revenues decreased by approximately $301,600 (or 29.9%)
from approximately $1,007,800 in 2003 to approximately $706,200 in
2004.
Revenues were negatively impacted by the continued weak demand in
its key markets, exacerbated by the Company's lack of financial
resources.
27
Products and Services
Sales to external customers by the two significant product and
service line groupings for the three months ended June 30, 2004
and 2003 (in thousands) are as follows:
June 30
-----------------------
2004 2003
--------- ---------
Enterprise Solutions $ 0 $ 84
Service, Maintenance and Other 706 924
--------- ---------
$ 706 $1,008
========= =========
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 $218,000 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 $17,300 (or 4.5%) to
$367,100 in 2004. As a percent of operating revenues, gross profit
was 52.0% in 2004 as compared to 38.1% in 2003. The gross profit
was favorably impacted by higher margin service and maintenance
revenues.
Operating Expenses:
Selling and administrative expenses decreased approximately
$389,700 (or 42.8%) from approximately $909,800 in 2003 to
$520,100 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.
28
The decrease in depreciation and amortization expense to
approximately $35,000 in 2004, as compared to approximately
$68,000 in 2003, is the result of certain assets becoming fully
depreciated.
Interest expense increased by approximately $18,400 to $266,400 in
2004. This increase is due to decreased borrowings.
Gain on settlements increased approximately $1,043,000 mainly due
to our abilitiy to settle certain debts and obligations for less
than their book value.
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
The net income for the period increased by approximately $1,428,500 or
170.0% to approximately $588,500 from a loss of $840,100 in 2003,
mainly due to the factors mentioned above.
Results of Operations
Nine months ended June 30, 2004 ("2004") compared to the nine
months ended June 30, 2003 ("2003").
Operating Revenues:
Operating revenues decreased by approximately $1,408,200 (or
40.6%) from approximately $3,464,500 in 2003 to approximately
$2,056,300 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.
29
Products and Services
Sales to external customers by the two significant product and
service line groupings for the nine months ended June 30, 2004 and
2003 (in thousands) are as follows:
June 30
---------------------------
2004 2003
---------- ----------
Enterprise Solutions $ 84 $ 889
Service and Maintenance 1,972 2,576
-------- --------
$ 2,056 $ 3,465
======== ========
Enterprise solutions revenues decreased to $84,000 in 2004 from
$889,000 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
$603,000 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.
Gross Profit:
Gross profit decreased by approximately $730,000 (or 43.7%) to
$941,500 in 2004. As a percent of operating revenues, gross
profit was 45.8% in 2004 as compared to 48.3% 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 by approximately
$1,889,900 (or 53.8%) from approximately $3,514,000 in 2003 to
approximately to $1,624,100 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.
30
The decrease in the depreciation and amortization expense to
$118,500 in 2004, as compared to approximately $206,300 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 $164,900 to $781,000
in 2004. This increase is due to increased borrowings and a
$54,000 charge related to warrants issued MidMark (see Note 6).
Other income increased mainly due to the $320,000 gain on
liquidation of the UK operations.
Gain on settlements increased approximately $1,043,000 mainly due
to our abilitiy to settle certain debts and obligations for less
than their book value.
The income tax provision (credit) is negligible in both years due
primarily to operating losses.
The net loss for the period decreased by approximately $2,407,500 or
91.4% to approximately $256,400 from $2,663,900 in 2003 mainly due
to the factors mentioned above.
Liquidity and Capital Resources
Based upon our substantial working capital deficiency
($29,362,800) and stockholders' deficiency ($30,689,500) at June
30, 2004, our recurring losses, our historic rate of cash consumption,
the uncertainty arising from our default on one 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 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 our obligations under
existing or possible litigation settlements 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.
31
Fiscal 2004:
Outlook
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.
The following initiatives related to raising the required funds,
settling liabilities and/or reducing expenses have been completed
recently or are in process:
(i) As of June 30, 2004, the Company had borrowed approximately
$6,528,000 from MidMark, a company that owns shares of Vertex's
preferred and common stock and has the ability to purchase a
majority interest in Vertex (see Note 6). 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". As explained below we have entered into an agreement
to convert these borrowing into equity.
32
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 6).
(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 nine months
ended June 30, 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 $7,573,000 of net
liabilities of the remaining European entities as of June 30, 2004
we expect to recognize an additional non-cash gain (without any
significant cash outlays); however, the amount and timing of such
gain and cash outlays, 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 June 30,
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. No
trade credits had been utilized through June 30, 2004.
33
(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 $3,655,000 of litigation related accruals at a
discount or with the issuance of shares of either Vertex or
XeQute. During the six months ended June 30, 2004, we realized
net gains of $325,000 from settlements of liabilities totaling
$450,000 through payments of $125,000 in cash.
(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
$2,250,000 from such sale as of June 30, 2004 (see Note 5). The
balance of $750,000 was received on August 12, 2004.
In conjunction with the sale of the convertible notes, we also
entered into an 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 6).
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.
34
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
Evaluation of Disclosure Controls and Procedures. As of June 30,
2004, the Company's management carried out an evaluation, under
the supervision of the Company's Chief Executive Officer and the
Chief Financial Officer of the effectiveness of the design and
operation of the Company's system of disclosure controls and
procedures pursuant to the Securities and Exchange Act,
Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures were effective, as of the date of their evaluation,
for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports
filed by the Company under the Securities Exchange Act of 1934.
35
Changes in internal controls. There were no changes in internal
controls over financial reporting, known to the Chief Executive
Officer or Chief Financial Officer that occurred during the
quarter ended June 30, 2004 that has materially affected,
or is likely to materially effect, the Company's 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.
36
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
$350,482.
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.
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.
37
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, Essex
County, a judgment was granted against the Company in the amount
of $142,155. The action alleged non payment by the Company for
computer hardware.
f) On or about March 22, 2004, an action against Vertex and our
subsidiary Renaissance Software, Inc. was commenced in New York
State Supreme Court, Nassau County, captioned Great Oak LLC vs.
Vertex Interactive, Inc. et al. The action, which demands
$327,676, alleges two months rent totaling $23,737 and an early
termination fee of $303,939 to be due Great Oak LLC, the landlord
of premises leased to Renaissance Software LLC. We vigorously
contest the allegations and anticipate defending the case vigorously.
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, which the
Company has made, until the balance of the payroll obligations are
paid.
38
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 June
30, 2004, were granted to these former employees.
Item 2.Changes in Securities and Use of Proceeds
To obtain funding for its ongoing operations, we entered into a
Securities Purchase Agreement with the selling stockholders on April 28,
2004 for the sale of (i) $3,000,000 in secured convertible notes and
(ii) warrants to buy 3,000,000 shares of our common stock.
The investors provided us with the funds as follows:
$1,500,000 was disbursed on April 28, 2004;
$750,000 was disbursed on May 28, 2004; and
$750,000 was disbursed on August 12, 2004.
50% of the secured convertible notes bear interest at 10%, mature
two years from the date of issuance, and are convertible into our
common stock, at the investors' option, at the lower of (i) $0.30
or (ii) 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 other 50% of the secured convertible notes bear interest
at 10%, mature two years from the date of issuance, and are
convertible into our common stock, at the investors' option,
at the lower of (i) $0.30 or (ii) 55% 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 secured convertible notes are due upon default under the
terms of secured convertible notes. In addition, we have granted
the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The
warrants are exercisable until five years from the date of
issuance at a purchase price of $0.11 per share. In addition
the warrants exercise price gets adjusted in the event we issue
common stock at a price below market, with the exception of any
securities issued as of the date of this warrant.
39
On May 26, 2004, we entered into an Investment Restructuring
Agreement with six accredited investors. In connection with
this transaction, we will exchange class C preferred stock for
class C-1 convertible preferred stock on a 1:1 basis and shall
issue, on the date that the amendment to the certificate of
incorporation increasing the authorized number of shares of
common stock is filed and approved with the New Jersey Secretary
of State, approximately 7,391 shares of class D convertible
preferred stock to MidMark Capital, L.P. in exchange for
approximately $7,500,000 of debt and accrued interest owed by us
and our subsidiaries to MidMark Capital II, L.P. As part of the
transaction, we issued 5,569,980 shares of common stock to
MidMark Capital, L.P.in exchange for the conversion of $306,793
of debt owed to MidMark Capital, L.P. In addition, we issued
240,000 shares of common stock to MidMark Capital II, L.P. in
exchange for the conversion of $2,400 of debt owed to MidMark
Capital II, L.P.
On July 28, 2004, we issued 350,000 shares of common stock to
Sloan Securities pursuant to a consulting agreement. This
issuance is considered exempt from registration under Section
4(2) of the Securities Act of 1933.
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.
40
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
August 19, 2004
41