Attached files
file | filename |
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EX-31.1 - Paradigm Holdings, Inc | v179115_ex31-1.htm |
EX-21.1 - Paradigm Holdings, Inc | v179115_ex21-1.htm |
EX-31.2 - Paradigm Holdings, Inc | v179115_ex31-2.htm |
EX-32.2 - Paradigm Holdings, Inc | v179115_ex32-2.htm |
EX-23.1 - Paradigm Holdings, Inc | v179115_ex23-1.htm |
EX-32.1 - Paradigm Holdings, Inc | v179115_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x Annual Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009
or
¨ Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Commission
File Number 000-09154
PARADIGM
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
WYOMING
|
83-0211506
|
(State
or other jurisdiction
of
incorporation)
|
(IRS
Employer Identification No.)
|
9715
KEY WEST AVE., 3RD FLOOR
ROCKVILLE,
MARYLAND
|
20850
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(301)
468-1200
Registrant's
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
COMMON
STOCK, $0.01 PAR VALUE
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes ¨ Nox
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ Nox
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¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer (do not check if a smaller reporting company) ¨
Smaller reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ Nox
The
aggregate market value of the registrant’s common stock held by non-affiliates
based on the closing price as of June 30, 2009 (the last business day of
registrant’s most recently completed second fiscal quarter) was approximately
$0.4 million.
Number of
shares of common stock outstanding as of March 18, 2010 was: 43,868,027
shares.
FORWARD-LOOKING
STATEMENTS
This Form
10-K includes and incorporates by reference forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include future events and our future financial performance. These
statements involve known and unknown risks, uncertainties and other factors that
may cause our or our industry’s actual results, levels of activity, performance
or achievements to be materially different from any results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements.
These
forward-looking statements are identified by their use of terms and phrases such
as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,”
“plan,” “predict,” “project,” “will” and similar terms and phrases, and may also
include references to assumptions. These statements are contained in the
sections entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” “Business” and other sections of this Form
10-K.
Such
forward-looking statements include, but are not limited to:
·
|
Funded
backlog;
|
·
|
Estimated
remaining contract value;
|
·
|
Our
expectations regarding the U.S. Federal Government’s procurement budgets
and reliance on outsourcing of services;
and
|
·
|
Our
financial condition and liquidity, as well as future cash flows and
earnings.
|
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these
statements. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, the reader should
specifically consider various factors, including the following:
·
|
Changes
in U.S. Federal Government procurement laws, regulations, policies and
budgets;
|
·
|
The
number and type of contracts and task orders awarded to
us;
|
·
|
The
integration of acquisitions without disruption to our other business
activities;
|
·
|
Changes
in general economic and business conditions and continued uncertainty in
the financial markets;
|
·
|
Technological
changes;
|
·
|
The
ability to attract and retain qualified
personnel;
|
·
|
Competition;
|
·
|
Our
ability to retain our contracts during any rebidding process;
and
|
·
|
The
other factors outlined under “Risk
Factors.”
|
If one or
more of these risks or uncertainties materialize, or if underlying assumptions
prove incorrect, actual results may vary materially from those expected,
estimated or projected. We do not undertake to update our forward-looking
statements or risk factors to reflect future events or
circumstances.
i
TABLE OF
CONTENTS
PART
I
|
||||
ITEM
1.
|
BUSINESS
|
1
|
||
ITEM
1A.
|
RISK
FACTORS
|
11
|
||
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
19
|
||
ITEM
2.
|
PROPERTIES
|
20
|
||
ITEM
3.
|
LEGAL
PROCEEDINGS
|
20
|
||
ITEM
4.
|
(REMOVED
AND RESERVED)
|
20
|
||
PART
II
|
||||
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
21
|
||
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
22
|
||
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22
|
||
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
34
|
||
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
34
|
||
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
34
|
||
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
34
|
||
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES
|
34
|
||
ITEM
9B.
|
OTHER
INFORMATION
|
35
|
||
PART
III
|
||||
ITEM
10
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
36
|
||
ITEM
11
|
EXECUTIVE
COMPENSATION
|
39
|
||
ITEM
12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
42
|
||
ITEM
13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
44
|
||
ITEM
14
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
45
|
||
PART
IV
|
||||
ITEM
15
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
47
|
||
SIGNATURES
|
|
|
48
|
CERTIFICATIONS
EXHIBIT
31.1
EXHIBIT
31.2
EXHIBIT
32.1
EXHIBIT
32.2
ii
PART
I
ITEM 1.
BUSINESS
COMPANY
OVERVIEW
Paradigm
Holdings, Inc. (“Paradigm” or the “Company”) (website: www.paradigmsolutions.com)
provides information technology (“IT”), information assurance, and business
continuity solutions, primarily to U.S. Federal Government customers.
Headquartered in Rockville, Maryland, the Company was founded based upon strong
commitment to high standards of performance, integrity, customer satisfaction,
and employee development.
With an
established core foundation of experienced executives, Paradigm has grown from
six employees in 1996 to the current level of 169 personnel. Our annual revenue
was $32.2 million in 2009.
As of
December 31, 2009, Paradigm was comprised of three subsidiary companies: 1)
Paradigm Solutions Corporation (“PSC), which was incorporated in 1996 to deliver
IT services to federal agencies, 2) Trinity IMS, Inc. (“Trinity”), which was
acquired on April 9, 2007 to deliver IT security and cyber forensics solutions
into the national security marketplace, and 3) Caldwell Technology Solutions,
LLC (“CTS”) which was acquired on July 2, 2007 to provide advanced IT solutions
in support of national security programs within the intelligence community.
Paradigm is dedicated to providing premier IT solutions to Paradigm’s federal
clients, focusing on expanding support for national security programs with
current and new customer agencies. Paradigm’s targeted agencies include the U.S.
Department of the Treasury, U.S. Department of Homeland Security (“DHS”), U.S.
Department of State, U.S. Department of Justice, and the U.S. Department of
Defense (“DoD”) (including Secretary of Defense, Army, Navy/Marine Corps, Air
Force, and Joint Forces Command), as well as agencies and departments comprising
the U.S. intelligence community, including the Office of the Director of
National Intelligence (“ODNI”). In addition, Paradigm serves other agency
clients such as the Department of Commerce in cases where they offer valuable
contract opportunities that require our specialized expertise or significantly
augment Paradigm’s revenue.
Paradigm
supports our clients’ mission-critical initiatives in four core technical
competency areas: Enterprise Optimization, Enterprise Solutions, Mission
Support, and Mission Assurance. Refer to Product and Service Offerings in this
section for additional discussion of these competency areas. We expect our
primary focus for business growth will be to pursue IT solutions work
with the DoD, DHS, intelligence community member agencies and other national
security oriented agencies where we believe the opportunity for profitable
business is greater.
Paradigm
is steadfast in its commitment to be a leading provider of technology and
mission services to the U.S. Federal Government, primarily supporting national
security missions. As an emerging member of the federal IT community, we plan to
build success and respect through the provision of specialized technical
services and solutions. We are committed to our customers’ mission success
through the delivery of high-quality IT services on-time and within budget
through reduced-risk transitions, program stability, and effective contract
implementation and administration. We are dedicated to employee development and
the advancement of a culture of integrity, teamwork, and trust, objectives that
we believe will be key factors in making us a leading employer and solution
provider of choice in our market.
CORPORATE
HISTORY
Paradigm,
formerly known as Cheyenne Resources, Inc. (“Cheyenne Resources”), was
incorporated in Wyoming on November 17, 1970.
Paradigm
acquired PSC, a Maryland corporation incorporated in 1996, through a reverse
acquisition on November 3, 2004. Cheyenne Resources, prior to the reverse
acquisition, operated principally in one industry segment, the exploration for
and sale of oil and gas. Cheyenne Resources had no operations as of the date of
the reverse acquisition, and the operations of PSC, which consisted primarily of
providing IT services to the federal government, continued following the reverse
acquisition.
On
December 17, 2004, Paradigm formed the wholly-owned subsidiary, Paradigm
Solutions International (“PSI”), to focus on providing IT and software solutions
to the commercial arena.
1
On
October 14, 2005, PSI acquired Blair Technology Group (“Blair”). PSI was the
surviving corporation and continued its corporate existence under the laws of
the State of Maryland as a wholly-owned subsidiary of Paradigm until February
28, 2007. The Company defined the commercial business as all of the outstanding
capital stock of PSI, which included all of the capital stock of Blair, and
certain assets associated with the OpsPlanner software tool. The Company
classified the commercial business as discontinued operations at December 31,
2006 based on the Company meeting the necessary criteria listed in Accounting
Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” The
Company completed the sale of the commercial business on February 28,
2007.
On
January 29, 2007, the Company entered into the Trinity Stock Purchase Agreement
by and among the Company, Trinity and certain shareholders of Trinity. On April
9, 2007, the Company completed the acquisition of Trinity.
On June
6, 2007, the Company entered into the Purchase Agreement by and among the
Company, CTS and its members. On July 2, 2007, the Company completed the
acquisition of CTS.
OUR
GROWTH STRATEGY
Our
strategy to grow our business in the federal IT market and expand our business
supporting national security customers and programs has several principal
components:
·
|
LEVERAGING
CURRENT INCUMBENT WORK—We emphasize thoroughly analyzing our current
customers and then systematically targeting and pursuing new business and
expansion opportunities within our existing customer set. The incumbency
analysis/leveraging process
involves:
|
|
·
|
Convening
focused meetings involving operations and business development staff for
all of our key incumbent contracts and ensuring continued strong
performance on projects and fostering positive relationships with our
customers and prime contractors.
|
|
·
|
Identifying
related and non-related divisions within existing customer organizations,
offices, and initiatives where Paradigm can add
value.
|
|
·
|
Identifying
contracts (current and new) within these offices/initiatives where we can
bid competitively as a prime or
subcontractor.
|
|
·
|
Analyzing
the competition (especially the incumbent where there is a current
contract) to determine relative strengths, weaknesses, and possible
winning strategies.
|
|
·
|
Meeting
systematically and frequently with current/potential
clients.
|
|
·
|
Continually
researching and deepening our knowledge of the goals and strategies of
each client organization.
|
|
·
|
Targeting
and qualifying the highest-priority opportunities where we have the best
chance to expand current or win new
business.
|
|
·
|
Committing
sufficient resources necessary to execute plans to win identified business
opportunities, focusing first on high-revenue, high-margin business where
are core competencies are most
relevant.
|
We
believe that leveraging the benefits of our incumbency is an efficient and
effective means of growing our Company based on where we are currently
performing most successfully. In particular, we emphasize strategies to learn of
viable opportunities long before the expected request for proposal date—at least
a year ahead whenever possible.
·
|
STRATEGIC
MARKET PENETRATION—To augment our efforts in building a profitable
business within new client agencies and arenas, management has implemented
a focused process of “strategic market penetration”. This process involves
the following:
|
|
·
|
Conducting
extensive research on the background, mission, and objectives of a new
agency/division.
|
|
·
|
Identifying
key contracts (current and projected) where we could provide a viable
alternative or more complete
solution.
|
|
·
|
Identifying
key decision-makers who influence contract awards and retaining outside
consultants who have deeper insight into key customer programs and
strategic priorities.
|
|
·
|
Researching
incumbent and other competitors.
|
|
·
|
Interviewing
decision-makers in depth to understand their mission and requirements and
introducing our success with other clients and our core
competencies.
|
2
|
·
|
Tracking
and pursuing new and re-compete opportunities within the
agency/division.
|
|
·
|
In
instances where it is not feasible or cost effective to penetrate a
strategic market or customer through the aforementioned methods, we will
selectively consider acquiring companies who have an established positive
track record of growth, profitability and strong technical performance.
Such acquisition candidates will be evaluated based
on:
|
|
·
|
Track
record of revenue growth and profitability in targeted customer agencies
where we have limited insight or ability to penetrate via traditional
marketing methods.
|
|
·
|
Percentage
of prime contracts (vs. subcontracts) as well as access to larger agency
or government wide acquisition contract
vehicles.
|
|
·
|
Key
technical offerings or employee skill sets that support or expand our
strategic core competencies.
|
The
process is carried out in a systematic, highly organized manner based on the
agencies and opportunities that appear to offer the greatest strategic fit with
our capabilities and strategic objectives.
·
|
STRATEGIC
ALLIANCES—We pursue strategic alliances with large systems integrators,
niche small businesses and innovative software and hardware vendors. We
are continually seeking relationships and innovative technologies that
allow us to apply our Enterprise Optimization, Enterprise Solutions,
Mission Assurance and Mission Support expertise to larger programs to
enhance growth prospects in the federal civilian, homeland security, law
enforcement or national security
markets.
|
Depending
on the alliance, we may partner with a company to provide integration services
to support our sales, or we will establish a relationship as a value-added
reseller (“VAR”) so we can sell the product in conjunction with our consulting
services as a complete solution. VAR relationships are advantageous as they
provide us with the opportunity to generate additional income through product
sales, as well as create additional customer loyalty since customers deal
primarily with Paradigm as the solution provider. We also pursue strategic
relationships with prime system integrator companies who have a significant
presence in target markets. By aligning with these firms as a subcontractor, we
accelerate our penetration of the space with a plan to move toward a niche prime
contractor role over time.
Furthermore,
our growth strategy emphasizes additional key elements, which
include:
|
·
|
Recruit,
train, and deploy a highly motivated, professional business development
team.
|
|
·
|
Selectively
add sales and professional delivery resources, deployed in a broader
geographic area.
|
|
·
|
Achieve
rapid expansion through organic growth and strategic
acquisitions.
|
|
·
|
Remain
focused in the federal civilian agency specific service offerings where we
have a track record of success and we support priority mission-related
projects.
|
|
·
|
Target
vertical market prospects in the homeland security, law enforcement, and
national security markets.
|
KEY
INFORMATION TECHNOLOGY TRENDS: GOVERNMENT
Key
trends within the federal arena that affects our growth and day-to-day success
include:
OFFICE OF
MANAGEMENT AND BUDGET (“OMB”) ACTIVISM AND AGENCY OVERSIGHT - Government
organizations rely heavily on outside contractors to provide skilled resources
to accomplish technology programs. We expect this reliance will continue to
intensify due to political and budgetary pressures in many government agencies
and also due to the difficulties facing governments in recruiting and retaining
highly skilled technology professionals in a competitive labor market. In
concert with its transition to more commercial-like practices, government is
increasingly outsourcing technology programs as a means of simplifying the
implementation and management of technology, so that government workers can
focus on their functional mission.
However,
counterbalancing increased reliance on outsourcing is increased oversight of
contractors and large IT projects. The OMB Management Watch List (“MWL”) was
established under the authority of the 1996 Clinger-Cohen Act and helps OMB
oversee the planning of IT investments at the start of the federal budget cycle
each fall when OMB receives fiscal year agency budget submissions. The
information under review within the business cases includes acquisition
strategies, security and privacy plans, and its organizational design. If the
agency’s investment plan contains one or more planning weaknesses, it is placed
on OMB’s MWL. Early 2007 marked the beginning of a new phase of accountability
and transparency. Since then, significant developments related to federal IT
management include:
3
|
·
|
As
of February 2007, with the release of the then President’s budget,
agencies have been instructed to post their IT investment business cases
(Exhibit 300) on the Internet.
|
|
·
|
OMB
agreed to release the MWL to Congress and the public on a quarterly
basis.
|
We
believe that over the next five years, federal IT program management will be
under watch and will continue to receive substantial attention over the forecast
period. With contracting making up more than a third of the federal
discretionary budget, increased federal contract oversight will be a main
focus.
CONSOLIDATION
AND MODERNIZATION PRESSURES COMBINED WITH UNITED STATES GOVERNMENT STAFF
SHORTAGE - We believe that political pressures and budgetary constraints are
forcing government agencies at all levels to improve their processes and
services and operate more efficiently. Organizations throughout the federal,
state and local governments—like their counterparts in the private sector—are
investing heavily in IT to improve effectiveness, enhance productivity and
extend new services in order to deliver increasingly responsive and
cost-effective public services. In addition, OMB is seeking opportunities to
leverage IT investments across the entire federal government through initiatives
such as the OMB Lines of Business and the Federal Desktop Core Configuration.
Also contributing to IT services demand are initiatives such as DoD
Transformation, DHS Integration, DoD Base Relocation and Consolidation and
ongoing information sharing initiatives.
We
believe that these Information Sharing initiatives, in particular, will continue
to drive consolidation and modernization efforts through a focus on Service
Oriented Architecture and Web Services. Information sharing is a recommendation
of the 9/11 Commission. For example, in an effort to share information more
freely, the intelligence community has established the ODNI since the passage of
the Intelligence Reform and Terrorism Prevention Act of 2004.
GLOBAL
WAR ON TERRORISM DRIVES BROAD SET OF MISSION SUPPORT REQUIREMENTS – We believe
that the United States faces a profound challenge in meeting the threats
associated with fighting terrorism around the globe. Beyond the
potential attacks on property and lives, protecting against potential losses
resulting from network outages, information theft, internal sabotage, viruses,
intellectual property infringement, and external hacking by terrorists and state
sponsored cyber attacks has become a priority of increasing importance to the
federal government. Criminals and terrorists generally seek to exploit
vulnerabilities and weaknesses in U.S. cyber security. Proposing methods for
identifying and preventing major attacks and developing plans and systems for
alerting, containing, and denying an attack and reconstituting essential
capabilities in the aftermath of an attack are all emerging as key components of
the U.S. homeland defense and national security strategies. This focus is
evidenced by increasing budgets and reliance on contractors for information
assurance and information operations support and solutions.
HEIGHTENED
SECURITY AND PRIVACY CONCERNS UNDERSCORE THE NEED FOR MISSION ASSURANCE - In
recent years, several factors have combined to greatly increase awareness of the
need for effective IT risk and business continuity management within the federal
government market. The OMB has added new requirements for incorporating the cost
of security in agency IT investments beginning with fiscal 2008 IT budget
submissions. In addition, agencies are expected now to provide detailed plans
regarding how they will successfully deploy their financial and human capital
resources to correct existing security weaknesses, such as those found during
privacy program reviews and implementation of security controls, and to
integrate security solutions over the lifecycle of each system undergoing
development, modernization or enhancement.
There is
also a renewed emphasis on contingency planning and continuity of operations
plans, especially as agencies expand the use of Web-services. Precautions must
be taken to ensure the survivability of agency networks. These factors
include:
|
·
|
Increased
regulatory requirements (corporate governance and the Federal Information
Security Management Act).
|
|
·
|
The
continued threat of terrorism (including employee sabotage and cyber
attacks) as evidenced by recent episodes of high profile data
compromise.
|
|
·
|
Increasing
threat and awareness of state sponsored cyber
attacks.
|
|
·
|
Homeland
Security Commission 9/11 Report standardization on how to measure
preparedness, National Fire Protection Association 1600, and Federal
Emergency Management Agency’s Federal Preparedness Circular 65 dated June
15, 2004 and updated March 1, 2006.
|
|
·
|
HSPD-20
establishes a comprehensive national policy on the continuity of federal
government structures and operations and a single National Continuity
Coordinator responsible for coordinating the development and
implementation of federal continuity
policies.
|
|
·
|
The
increasing awareness of the negative mission impact of natural disasters
such as hurricanes, floods and tornados increases receptivity of current
and prospective clients to Mission Assurance
offerings.
|
4
PRODUCT
& SERVICE OFFERINGS
We are an
information technology and business solutions provider focused on supporting the
operational efficiency and security of government enterprises. As a federal
government contracting partner, we help our clients plan, perform and assure
(i.e. secure and protect) their essential mission functions, especially those
involving IT systems.
With a
proven track record of program management, contract transitions support, and
project implementations, we have consistently delivered quality services and
solutions as specified by our clients, within budget, and on time. Our practice
areas include Enterprise Optimization, Enterprise Solutions, Mission Support,
and Mission Assurance.
·
|
ENTERPRISE
OPTIMIZATION—We focus on results, and we demand, high performance
standards in all aspects of delivering service to our customers to ensure
mission success. To fully support the missions of our clients we focus on
the planning aspects of projects, starting with the enterprise
architecture and optimizing the performance of existing systems and
infrastructure investments, focusing on federally mandated standards. We
also extend our support services to system sustainment services, applying
proactive and measurable results-oriented strategies for the management
and delivery of IT projects and supporting services. This practice area
encompasses:
|
|
·
|
Program
Management Office
|
|
·
|
Strategic
Consulting (including total cost of ownership
analysis)
|
|
·
|
Enterprise
Architecture
|
|
·
|
Information
Technology Infrastructure Library
(“ITIL”)
|
Government
agencies, both civilian and defense, have come under increasing pressure due to
budget constraints and Congressional oversight, to demonstrate value in their
projects and alignment of their programs with strategic and tactical objectives.
These performance and oversight requirements have resulted in the proliferation
of program management offices within federal agencies to implement a common
framework, describe and analyze IT investments, enhance inter-organizational
collaboration, and ensure that agencies are seeking transformation into
results-oriented, market-based organizations.
Enterprise
Optimization skills are a critical element of our offerings because the practice
area: a) involves highly skilled technical expertise that can command higher
margins, b) often requires security clearance levels that are difficult to
acquire, thus increasing demand, and c) enables us to connect with the senior
decision makers and understand operational infrastructure of federal
organizations.
·
|
ENTERPRISE
SOLUTIONS—This practice area involves the development and deployment of
mission-critical, often enterprise-wide, solutions that are central to the
organization and management of information. The practice area involves the
full life cycle of IT support and
encompasses:
|
|
·
|
Systems
Engineering
|
|
·
|
Software
& Database Engineering
|
|
·
|
Desktop
Engineering
|
|
·
|
Enterprise
Deployment & Distribution
|
|
·
|
Infrastructure
Operations
|
|
·
|
Data
Center & Facilities Management
|
Enterprise
Solutions are a critical element of our offerings because the practice area: a)
involves enterprise-wide involvement with a client’s network, which can in
itself yield additional areas of opportunity, b) allows for relatively long-term
and full-time equivalent (“FTE”) intensive contracts, and c) enables us to
connect with the operational infrastructure of commercial and federal
organizations while building an “entrenched” role and position for our
Company.
5
·
|
MISSION
SUPPORT—This practice moves beyond technical and engineering support to
deliver solutions that directly support the missions of our customers. In
these engagements, our employees often work as an integrated member
of a government team to provide the following
services:
|
· Specialized
Engineering
· Technical
Support
· Linguistics
· Intelligence
Analysis
· Quick
Reaction Capabilities
Mission
support skills are a critical element of our offerings because the practice
area: a) involves highly skilled technical expertise that can command higher
margins, b) often requires security clearance levels that can yield greater
profit, and c) expands our exposure to the national security community, a market
area that has demonstrated strong demand for mission support services like those
we provide.
·
|
MISSION
ASSURANCE—This practice area involves providing services that help to
secure, protect and sustain the various missions of our federal clients.
We are prepared to assist our federal partners with any phase of their
information security, critical infrastructure protection or continuity
programs, including: policy creation, business impact analysis, risk
analysis, strategy selection, plan creation, test, training, exercise,
plan maintenance, lab and systems operations, and supporting services. The
practice area encompasses:
|
· Computer
and Network Forensics
· Critical
Infrastructure Protection
· Continuity
of Operations Consulting
· IT
Contingency Planning/Disaster Recovery Consulting Services
· Pandemic
Influenza Planning
· Certification
and Accreditation Services
We work
to protect the nation's critical infrastructure components and resources from
natural disasters, acts of terrorism, and other emergencies by applying
methodologies and tools to identify and analyze risks, and deploy systems to
reduce those risks and the consequences of an event. With
the current level of national security concerns and the increase in security
related incidents such as fraud, network penetration, theft of proprietary
information, and corporate espionage, our computer forensics expertise has
become an important part of information protection and incident response for
certain federal agencies.
Mission
Assurance is a critical element of our offerings because the quadrant: a) “opens
up” program areas within a client organization that can be different from the
Chief Information Office or technology-focused divisions, b) allows for
relatively long-term and FTE intensive contracts, c) enables Paradigm to
penetrate deep within the operational infrastructure of a federal organization
while building a key enterprise role and relationship for our Company, and d)
expands our exposure to the law enforcement, homeland security, and national
security markets.
In
addition to service-focused expertise, we are the primary reseller in the
federal market for a licensed proprietary software tool, OpsPlanner ™ through
our reseller agreement with PSI. OpsPlanner is one of the first tool sets to
integrate continuity planning, emergency management, and automated notification
in one easy-to-use platform. Although the intellectual property rights of this
offering transferred with the sale of the commercial business on February 28,
2007, we plan to continue to utilize OpsPlanner as part of our business
continuity consulting practice in the federal government market. From inception,
this platform was developed as an integrated application—unlike those of
competitors, which offer continuity planning, emergency management and automated
notification as separate software modules. We believe that the OpsPlanner™
offering, when implemented with our consulting expertise, provides a superior
solution for continuity of operations planning and risk management
challenges.
6
EXISTING
CUSTOMER SERVICE EXAMPLES
COMPUTER
FORENSIC
Challenge:
Develop and implement a comprehensive cyber security support
capability.
Results: Our
personnel are involved in supporting the full life cycle of cyber security
efforts for U.S. government agencies. From network monitoring in
24x7x365 security operation centers where analysts monitor possible network
intrusions to analysis of malware attacks and exploits by sophisticated cyber
adversaries, our cyber security professionals are involved in many aspects of
cyber incident response and management. We also support policy
initiatives to help our customers understand how to address cyber security
challenges via policy and regulatory changes. Our technical staff
generally holds technical certifications such as Certified Information System
Security Professional (CISSP) and have experience in utilizing a broad range of
cyber security toolsets related to intrusion detection sensors (IDS), forensic
analysis, and incident response and management.
Challenge: Support
for full-service law enforcement-oriented digital forensics
laboratory.
Results: Our
forensics experts provide ongoing support for many aspects of federal U.S.
government law enforcement digital forensic laboratories. From
evidence collection and handling (including imaging of hard drives and mobile
device) in accordance with legal chain of custody requirements to comprehensive
analysis and preparation of large volumes of digital evidence in support of
ongoing criminal cases, our forensic technical staff are a part of our
customers’ mission execution. We work side-by-side with law
enforcement staff throughout the lifecycle of investigations and
cases. Most of our forensic technicians are certified evidence
handlers and familiar with specialized tools that enable them to review data
stored on a wide range of digital devices from servers to mobile phones to video
game boxes.
ENTERPRISE
DATA MANAGEMENT
Challenge:
Providing continuity of services for deployed applications, business systems,
and tools.
Results:
Our team provides centralized information systems development, operations and
maintenance, and technical infrastructure engineering and operations in support
of our client missions. Our team provides full lifecycle support to include
adaptive, corrective, and perfective maintenance as well as technology refresh.
These services create data content and enable our customers to track maintenance
and enhancement expenditures.
ENTERPRISE
OPERATIONS & MAINTENANCE
Challenge:
Providing nationwide continuity of services for high speed print systems and
peripherals.
Results:
We provide the tools, materials, personnel, and expertise in support of
maintaining mission critical high speed print system and peripheral operations.
Our team provides 24x7 preventive and remedial maintenance support, and responds
to service requests anywhere in the continental United States. These services
increase system availability, accelerate problem resolution, and minimize
operational disruption.
DISASTER
RECOVERY & BUSINESS CONTINUITY SUPPORT
Challenge:
Developing, testing, and implementing recovery objectives for the
enterprise.
Results:
Our team assists customers in continuity of operations, emergency/incident
management and disaster recovery planning, testing, and program management. Our
services include analysis of our customer’s mission/business operations to
determine the potential business impacts of disasters and the appropriate order
of recovery following an incident. Further, we identify recovery requirements
for supporting infrastructure and capabilities, including personnel, facilities,
technological and communication assets. Our team also provides consulting
expertise for pandemic influenza, training related to emergency management, and
services related to continuity exercise development and
evaluation.
7
MISSION
CRITCAL INFRASTRUCTURE ENGINEERING, INSTALATION AND SUSTAINMENT
Challenge:
Completing design, installation and sustainment services for over 25 separate
sites around the world while supporting our customer’s missions and associated
regulations.
Results:
Mission Critical Infrastructure support to the federal government for the total
data center environment, including buildings, equipment, and occupants. These
solutions include facility infrastructure survey and analysis, turn-key system
design, integration, program management, circuit tracing, and installation and
maintenance services for the following: uninterruptable power supplies (UPS),
engine generators (EG) and transfer switches, cabling and distribution including
fiber optics, lightning suppression, heating, ventilation and air conditioning
(HVAC), clean agent fire suppression, and maintenance and warranty.
EXISTING
CONTRACT PROFILES
As of
December 31, 2009, we had a portfolio of 31 active contracts with the federal
government. Contract mix for the year ended December 31, 2009 was 56% fixed
price contracts and 44% time and materials contracts.
Under a
fixed price contract, the contractor agrees to perform the specified work for a
firm fixed price. To the extent that actual costs vary from the price negotiated
we may generate more or less than the targeted amount of profit or even incur a
loss. We generally do not pursue fixed price software development work that we
believe may create material financial risk. We do, however, execute some fixed
price labor hour and fixed price level of effort contracts which represent
similar levels of risk as time and materials contracts in that these fixed price
contracts involve a defined number of hours for defined categories of personnel.
We refer to such contracts as “level of effort” contracts.
Under a
time and materials contract, the contractor is paid a fixed hourly rate for each
direct labor hour expended and is reimbursed for direct costs. To the extent
that actual labor hour costs vary significantly from the negotiated rates under
a time and materials contract, we may generate more or less than the targeted
amount of profit.
Cost-plus
contracts provide for reimbursement of allowable costs and the payment of a fee
which is the contractor’s profit. Cost-plus fixed fee contracts specify the
contract fee in dollars or as a percentage of allowable costs. Cost-plus
incentive fee and cost-plus award fee contracts provide for increases or
decreases in the contract fee, within specified limits, based upon actual
results as compared to contractual targets for factors such as cost, quality,
schedule and performance.
Our
contract mix for the fiscal years ended 2009 and 2008 is summarized in the table
below.
Contract
Type
|
2009
|
2008
|
||||||
Fixed
Price (FP)
|
56 | % | 60 | % | ||||
Time
and Materials (T&M)
|
44 | % | 40 | % | ||||
Cost-Plus
(CP)
|
0 | % | 0 | % |
Listed
below are our top programs by 2009 revenue, including single award
and multiple award contracts.
TOP
PROGRAMS/CONTRACTS BY 2009 REVENUE
($ in
millions)
Contract Programs
|
Customer
|
Period of
Performance
|
2009
Revenue
|
Estimated
Remaining
Contract
Value as of
12/31/09
|
Type
|
||||||||
ACCESS-LTMCC
|
Department
of Treasury - IRS
|
October
2007 - September 2012
|
$ | 4.9 | $ | 6.0 |
FP
|
||||||
OCC-GSO
|
Department
of Treasury – Office of the Comptroller of the Currency
|
January
2005 – September 2012
|
$ | 5.8 | $ | 16.4 |
FP
|
8
DESCRIPTION
OF MAJOR PROGRAMS / CONTRACTS:
DEPARTMENT
OF THE TREASURY - INTERNAL REVENUE SERVICE, LONG TERM MAINTENANCE
OF COMPUTING CENTERS (“LTMCC”)
We
provide computing center hardware maintenance and software administration
support to the IRS main Tax Reporting Systems in Detroit, Michigan and
Martinsburg, West Virginia. At the IRS Detroit Computing Center, we currently
respond to hardware remedial and preventive maintenance and we administer the
software that resides on the IBM z990, 2084-302 mainframe. Our staff of
technicians supports the Enterprise Computing Center at Martinsburg’s more than
1425 IBM/IBM compatible peripherals and higher maintenance items in place at the
IRS that include sophisticated tape drives, monitors, and printers. We have
established a technical support center to resolve problems on a 24x7x365 basis.
As of October 1, 2007, we migrated our prime contract role to being the primary
subcontractor on the contract.
DEPARTMENT
OF THE TREASURY – OFFICE OF THE COMPTROLLER OF THE CURRENCY GLOBAL SERVER
OPERATIONS (“OCC-GSO”)
We
provide facilities maintenance, mainframe operations, client server operations
and network operations center support services to the OCC. With a team of over
forty personnel that operate on site supporting the OCC mission, we are
responsible for key functional areas in the network operations center, including
support of mainframe legacy systems, security monitoring, desktop engineering,
and facility management.
BACKLOG
Backlog
is the estimate of the amount of revenue expected to be realized over the
remaining life of awarded contracts and task orders we have in hand as of the
measurement date. Total backlog consists of funded and unfunded backlog. We
define funded backlog as estimated future revenue under government contracts and
task orders for which funding has been authorized and appropriated by Congress
for expenditure by the applicable agency and the agency has modified our
contract to reflect the funding level. Unfunded backlog is the difference
between total backlog and funded backlog. Unfunded backlog reflects the estimate
of future revenue under awarded government contracts and task orders for which
either funding has not yet been appropriated or expenditure has not yet been
authorized. Total backlog does not include estimates of revenue from
government-wide acquisition contracts (“GWAC”) or General Services
Administration (“GSA”) schedules beyond task orders and delivery orders that
have already been awarded, but unfunded backlog does include estimates of
revenue beyond awarded or funded task orders for other types of indefinite
delivery, indefinite quantity (“ID/IQ”) contracts.
Total
backlog as of December 31, 2009 was approximately $77.1 million, of which
approximately $17.7 million was funded. Total backlog as of December 31, 2008
was approximately $68.6 million, of which approximately $16.4 million was
funded. However, there can be no assurance that we will receive the amounts we
have included in backlog or that we will ultimately recognize the full amount of
our funded backlog as of December 31, 2009. We estimate our funded backlog will
be recognized as revenue during fiscal 2010 or thereafter.
We
believe that backlog is not necessarily indicative of the future revenue that we
will actually receive from contract awards that are included in calculating our
backlog. We assess the potential value of contracts for purposes of backlog
based upon several subjective factors. These subjective factors include our
judgments regarding historical trends (e.g., how much revenue we have received
from similar contracts in the past), competition (e.g., how likely are we to
successfully keep all parts of the work to be performed under the contract), and
budget availability (e.g., how likely is it that the entire contract will
receive the necessary funding). If we do not accurately assess each of these
factors, or if we do not include all of the variables that affect the revenue
that we recognize from our contracts, the potential value of our contracts, and
accordingly, our backlog, will not reflect the actual revenue received from
contracts and task orders. As a result, there can be no assurance that we will
receive amounts included in our backlog or that monies will be appropriated by
Congress or otherwise made available to finance contracts and task orders
included in our backlog. Many factors that affect the scheduling of projects
could alter the actual timing of revenue on projects included in backlog. There
is always the possibility that the contracts could be adjusted or cancelled. We
adjust our backlog on a quarterly basis to reflect modifications to or renewals
of existing contracts.
9
BUSINESS
DEVELOPMENT SUMMARY
Our
business development function is based on a team approach wherein our
executives, business development (“BD”), and operations managers and staff
interact and coordinate closely on a day-to-day basis to build our business in
mission-critical areas for our customers. New opportunities are identified and
qualified by all three functional areas (executive, BD, and operations)—this
helps to gain maximum leverage from all BD budgeted resources as well as to more
quickly and effectively penetrate our targeted client
organizations.
We employ
a formal methodology for identifying, pursuing, and capturing new business.
Day-to-day business development efforts are based on the following
principles:
·
|
Fully
leverage current client relationships to: a) grow current contracts, and
b) identify and win new opportunities within not only the current
divisions/departments, but also across the client
organization.
|
·
|
Manage
and communicate critical client and opportunity information effectively
across development and operations groups to help take advantage of all
available knowledge and insight—working fully as a
team.
|
·
|
Qualify
opportunities according to a structured, systematic process that helps
ensure that we devote our resources to the highest priority
leads.
|
·
|
Measure
and evaluate our achievements against a specific, quantifiable set of
short and long-term objectives.
|
Furthermore,
we employ a systematic approach to opportunity identification, qualification,
and capture. The overarching goal is to continually refine business development
efforts, placing much greater emphasis on opportunities that provide sufficient
lead time for us to win. The Company’s lead qualification and bid/no-bid
processes support this structured approach, helping to ensure that we devote the
vast majority of our resources to the most winnable bids.
COMPETITIVE
ANALYSIS
Today we
operate in an environment characterized by increased competition and additional
barriers to entry. Some of these barriers include:
·
|
Highly
specialized areas (e.g. enterprise resource planning) where entrenched
competitors have an advantage in terms of industry recognition or
proprietary products/services.
|
·
|
“Economies
of scale” offered by the very largest competitors, who at times can
provide solutions cost-effectively due to their sheer
size.
|
·
|
Contract
bundling scenarios where agencies render only the largest contractors
competitive because of the size and scope of the
requirement.
|
We
compete with many companies, both large and small, for our contracts. We do not
have a consistent number of competitors against which we repeatedly compete.
These and other companies in our market may compete more effectively than we can
because they are larger, have greater financial and other resources, have better
or more extensive relationships with governmental officials involved in the
procurement process, and have greater brand or name recognition.
We have
developed—and will continually refine—a multi-element approach to attempt to
compete effectively even in the presence of one or all of the above factors. We
offer an array of services and solutions that support our client's ability to
focus on their core functional responsibilities and leverage, protect, and
maximize their IT investments. More importantly, we are committed to utilizing
industry best practices to implement emerging technologies while providing
innovative solutions to support and advance our customer's mission.
Our
competitive strengths include the following:
·
|
Focused
Mission Assurance Practice with expertise in Information
Assurance.
|
·
|
Increased
emphasis on quality and performance measurement through ITIL and
capability maturity model processes - this allows us to compete more
effectively on procurements where quality processes signify a key
evaluation criterion.
|
·
|
Proactive
approach to identifying the latest technology and business trends - we
work as a corporate-wide team to research, identify, and discuss
technology and trends impacting our
industry.
|
·
|
Large
pool of resources to develop leading-edge technology and business
solutions - in addition to our highly capable staff, we have access to a
pool of expert consulting resources to help customize solutions to meet
client needs.
|
·
|
Outstanding
management solutions through best practices and processes - we interact
routinely to share information on best business practices that can be
applied to all business opportunities and
contracts.
|
·
|
Ongoing
Customer Relationship Management program that is a highly responsive
approach to achieving high customer satisfaction - a key distinguishing
factor for us is the excellent reputation attained with our customers over
the years.
|
10
We
routinely apply these competitive strengths in bidding on new procurements - as
well as in performing work on our current contracts.
CULTURE,
PEOPLE, AND RECRUITING
To ensure
effective response to the key trends outlined in the previous section, we have
developed and nurtured a corporate culture that promotes excellence in job
performance, respect for the ideas and judgment of our colleagues, and
recognition of the value of the unique skills and capabilities of our
professional staff. We utilize a wide variety of methodologies and techniques to
attract and retain highly qualified and ambitious staff, helping to ensure
continuity of support and client satisfaction. Integrity and the highest
standards of ethics are also emphasized as core principles for our Company
culture.
Furthermore,
we strive to establish an environment in which all employees can make their best
personal contribution and have the satisfaction of being part of a unique,
forward-looking team.
As of
December 31, 2009, we had 169 personnel (full time, part time, and consultants).
Of total personnel, 150 were IT service delivery professionals and consultants
and 19 were management and administrative personnel performing corporate
marketing, human resources, finance, accounting, internal information systems,
and administrative functions. None of our personnel is represented by a
collective bargaining unit. As of December 31, 2008, we had 189 personnel (full
time, part time, and consultants). Of total personnel, 160 were IT service
delivery professionals and consultants and 29 were management and administrative
personnel performing corporate marketing, human resources, finance, accounting,
internal information systems, and administrative functions.
WEBSITE
ACCESS TO REPORTS
Our
filings with the U.S. Securities and Exchange Commission (the “SEC”) and other
information, including our Ethics Policy, can be found on our website (www.paradigmsolutions.com).
Information on our website does not constitute part of this report. We make
available free of charge, on or through our Internet website, as soon as
reasonably practicable after they are electronically filed with or provided to
the SEC, among other things, our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those
reports.
ITEM 1A.
RISK FACTORS
WE MAY
NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
We have
relied on significant external financing to fund our operations. As of December
31, 2009 and December 31, 2008, we had $895,711 and $52,257, respectively, in
cash and our total current assets were $7,786,579 and $8,668,833, respectively.
As of December 31, 2009, current liabilities exceeded current assets by
$494,739. We may need to raise additional capital to fund our anticipated
operating expenses and future expansion. Among other things, external financing
may be required to cover our operating costs. If we do not maintain profitable
operations, it is unlikely that we will be able to secure additional financing
from external sources. The sale of our common stock to raise capital may cause
dilution to our existing shareholders. Any of these events would be materially
harmful to our business and may result in a lower stock price. Our inability to
obtain adequate financing may result in the need to curtail business
operations.
On
February 27, 2009, the Company completed the sale, in a private placement
transaction, of 6,206 shares of Series A-1 Senior Preferred Stock (“Series A-1
Preferred Stock”), Class A Warrants to purchase up to an aggregate of
approximately 79.6 million shares of common stock with an exercise price equal
to $0.0780 per share (the “Class A Warrants”) and Class B Warrants to
purchase up to an aggregate of approximately 69.1 million shares of common stock
at an exercise price of $0.0858 per share (the “Class B Warrants”) to a group of
investors, led by Hale Capital Partners, LP. Paradigm received gross
proceeds of approximately $6.2 million from the private placement. Among
the use of proceeds, $2.1 million was used to pay off the promissory note issued
in connection with our acquisition of Trinity, we paid fees and transaction
costs of approximately $1.1 million and we used the remaining $3.0 million to
pay down debt and for general working capital purposes. Despite the proceeds
from the private placement, we may need to raise additional capital in the
future. Our inability to obtain adequate financing may result in the need to
curtail business operations. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
11
ALL OF
OUR ASSETS ARE PLEDGED TO SECURE CERTAIN DEBT OBLIGATIONS, WHICH WE COULD FAIL
TO REPAY
Our Loan
and Security Agreement, dated March 13, 2007, with Silicon Valley Bank (“SVB”),
secures our repayment obligations with a first priority perfected security
interest in any and all assets of Paradigm as described in the Loan and Security
Agreement and in related intellectual property security agreements. Under the
Loan and Security Agreement, our line of credit is due on demand and interest is
payable monthly based on a floating per annum rate based on the Prime Rate plus
a premium as is more fully set forth in Loan and Security Agreement. In the
event we are unable to timely repay any amounts owed under the Loan and Security
Agreement, we could lose all of our assets and be forced to curtail our business
operations. In addition, because our debt obligations with SVB are secured with
a first priority lien, it may make it more difficult for us to obtain additional
debt financing from another lender, or obtain new debt financing on terms
favorable to us, because such new lender may have to be willing to be
subordinate to SVB. The expiration date of the Loan and Security Agreement has
been extended to June 11, 2010.
ALL OF
OUR REVENUE WOULD BE SUBSTANTIALLY THREATENED IF OUR RELATIONSHIPS WITH AGENCIES
OF THE FEDERAL GOVERNMENT WERE HARMED
Our
largest clients are agencies of the federal government. If the federal
government in general, or any significant government agency, uses less of our
services or terminates its relationship with us, our revenue could decline
substantially and we could be forced to curtail our business operations. During
the year ended December 31, 2009, contracts with the federal government and
contracts with prime contractors of the federal government accounted for 100% of
our revenue. During that same period, our three largest clients, all agencies
within the federal government, generated approximately 74% of our revenue. We
believe that federal government contracts are likely to continue to account for
a significant portion of our revenue for the foreseeable future.
WE MAY
LOSE MONEY OR GENERATE LESS THAN ANTICIPATED PROFITS IF WE DO NOT ACCURATELY
ESTIMATE THE COST OF AN ENGAGEMENT WHICH IS CONDUCTED ON A FIXED-PRICE
BASIS
We
perform a significant portion of our engagements on a fixed-price basis. We
derived 56% of our total revenue in the fiscal year ended December 31, 2009 and
60% of our total revenue in the fiscal year ended December 31, 2008 from
fixed-price contracts. Fixed price contracts require us to price our contracts
by predicting our expenditures in advance. In addition, some of our engagements
obligate us to provide ongoing maintenance and other supporting or ancillary
services on a fixed-price basis or with limitations on our ability to increase
prices.
When
making proposals for engagements on a fixed-price basis, we rely on our
estimates of costs and timing for completing the projects. These estimates
reflect our best judgment regarding our capability to complete the task
efficiently. Any increased or unexpected costs or unanticipated delays in
connection with the performance of fixed-price contracts, including delays
caused by factors outside our control, could make these contracts less
profitable or unprofitable. From time to time, unexpected costs and
unanticipated delays have caused us to incur losses on fixed-price contracts,
primarily in connection with state government clients. On rare occasions, these
losses have been significant. In the event that we encounter such problems in
the future, our actual results could differ materially from those
anticipated.
Many of
our engagements are also on a time-and-material basis. While these types of
contracts are generally subject to less uncertainty than fixed-price contracts,
to the extent that our actual labor costs are higher than the contract rates,
our actual results could differ materially from those anticipated.
THE
CALCULATION OF OUR BACKLOG IS SUBJECT TO NUMEROUS UNCERTAINTIES AND WE MAY NOT
RECEIVE THE FULL AMOUNTS OF REVENUE ESTIMATED UNDER THE CONTRACTS INCLUDED IN
OUR BACKLOG, WHICH COULD REDUCE OUR REVENUE IN FUTURE PERIODS.
Backlog
is our estimate of the amount of revenue we expect to realize over the remaining
life of the signed contracts and task orders we have in hand as of the
measurement date. Our total backlog consists of funded and unfunded backlog. In
the case of government contracts, we define funded backlog as estimated future
revenue under government contracts and task orders for which funding has been
appropriated by Congress and authorized for expenditure by the applicable agency
under our contracts. Unfunded backlog is the difference between total backlog
and funded backlog. Our total backlog does not include estimates of backlog from
GWAC or GSA schedules beyond signed, funded task orders, but does include
estimated backlog beyond signed, funded task orders for other types of ID/IQ
contracts.
12
The
calculation of backlog is highly subjective and is subject to numerous
uncertainties and estimates, and there can be no assurance that we will in fact
receive the amounts we have included in our backlog. Our assessment of a
contract’s potential value is based upon factors such as historical trends,
competition, and budget availability. In the case of contracts which may be
renewed at the option of the applicable agency, we generally calculate backlog
by assuming that the agency will exercise all of its renewal options; however,
the applicable agency may elect not to exercise its renewal options. In
addition, federal contracts typically are only partially funded at any point
during their term and all or some of the work to be performed under a contract
may remain unfunded unless and until Congress makes subsequent appropriations
and the procuring agency allocates funding to the contract. Our estimate of the
portion of backlog from which we expect to recognize revenue in fiscal 2010 or
any future period is likely to be inaccurate because the receipt and timing of
any of these revenue is dependent upon subsequent appropriation and allocation
of funding and is subject to various contingencies, such as timing of task
orders, many of which are beyond our control. In addition, we may never receive
revenue from some of the engagements that are included in our backlog and this
risk is greater with respect to unfunded backlog. The actual receipt of revenue
on engagements included in backlog may never occur or may change because a
program schedule could change, the program could be canceled, the governmental
agency could elect not to exercise renewal options under a contract or could
select other contractors to perform services, or a contract could be reduced,
modified or terminated. Additionally, the maximum contract value specified under
a government contract or task order awarded to us is not necessarily indicative
of the revenue that we will realize under that contract. We also derive revenue
from ID/IQ contracts, which typically do not require the government to purchase
a specific amount of goods or services under the contract other than a minimum
quantity which is generally very small. If we fail to realize revenue included
in our backlog, our revenue and operating results for the then current fiscal
year as well as future reporting periods may be materially harmed.
OUR
GOVERNMENT CONTRACTS MAY BE TERMINATED OR ADVERSELY MODIFIED PRIOR TO
COMPLETION, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
We derive
substantially all of our revenue from government contracts that typically are
awarded through competitive processes and span a one year base period and one or
more option years. The unexpected termination or non-renewal of one or more of
our significant contracts could result in significant revenue shortfalls. Our
clients generally have the right not to exercise the option periods. In
addition, our contracts typically contain provisions permitting an agency to
terminate the contract on short notice, with or without cause. Following
termination, if the client requires further services of the type provided in the
contract, there is frequently a competitive re-bidding process. We may not win
any particular re-bid or be able to successfully bid on new contracts to replace
those that have been terminated. Even if we do win the re-bid, we may experience
revenue shortfalls in periods where we anticipated revenue from the contract
rather than its termination and subsequent re-bidding. These revenue shortfalls
could harm operating results for those periods and have a material adverse
effect on our business, prospects, financial condition and results of
operations.
OUR LOAN
AND SECURITY AGREEMENT WITH SVB, OUR PREFERRED STOCK PURCHASE AGREEMENT WITH THE
HOLDERS OF OUR SERIES A-1 SENIOR PREFERRED STOCK AND THE CERTIFICATE OF
DESIGNATIONS OF THE SERIES A-1 SENIOR PREFERRED STOCK CONTAIN COVENANTS THAT MAY
LIMIT OUR LIQUIDITY AND CORPORATE ACTIVITIES
Our Loan
and Security Agreement with SVB, our Preferred Stock Purchase Agreement with the
holders of our Series A-1 Senior Preferred Stock and the Certificate of
Designations of the Series A-1 Senior Preferred Stock impose operating and
financial restrictions on us. These restrictions may limit our ability to, among
other things:
·
|
incur
additional indebtedness or modify the terms of existing
indebtedness;
|
·
|
sell
assets;
|
·
|
create
liens on our assets;
|
·
|
sell
capital stock;
|
·
|
make
investments;
|
·
|
engage
in mergers or acquisitions;
|
·
|
pay
dividends or redeem or repurchase capital
stock
|
·
|
change
the size of our Board of Directors;
and
|
·
|
undertake
certain fundamental
transactions.
|
In
addition, we are subject to a number of financial covenants that require us to,
among other things, maintain minimum amounts of cash, minimum gross revenues,
minimum EBITDA and minimum amounts of working capital. Therefore, we may need to
seek permission from our lenders and/or the holders of our Series A-1 Senior
Preferred Stock in order to undertake certain corporate actions. The interests
of the holders of our Series A-1 Senior Preferred Stock and/or our lenders may
be different from those of our common stockholders.
13
CURRENT
ECONOMIC CONDITIONS, INCLUDING THOSE RELATED TO THE CREDIT MARKETS, MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Recent global market and economic
conditions have been unprecedented and challenging with tighter credit
conditions and recession in most major economies continuing into 2010. Continued
concerns about the systemic impact of potential long-term and wide-spread
recession, energy costs, geopolitical issues, the availability and cost of
credit, and the global housing and mortgage markets have contributed to
increased market volatility and diminished expectations for Western and emerging
economies. In the second half of 2008, added concerns fueled by the U.S.
government conservatorship of the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association, the declared bankruptcy of Lehman
Brothers Holdings Inc., the U.S. government financial assistance to American
International Group Inc., Citibank, Bank of America and other federal government
interventions in the U.S. financial system lead to increased market uncertainty and instability in both
U.S. and international capital and credit markets. These conditions declining
business and consumer confidence and increased unemployment, have contributed to
volatility of unprecedented levels.
As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and institutional
investors to reduce, and in some cases, cease to provide credit to businesses
and consumers. As a result of the tightening credit markets, we may not be able
to obtain additional financing on favorable terms, or at all. If the financial
institution that supports our existing credit facility fails, we may not be able
to find a replacement, which would negatively impact our ability to borrow under
our credit facility. In addition, if the current pressures on credit continue or
worsen, we may not be able to refinance our outstanding debt when due, which
could have a material adverse effect on our business, results of operations or
financial condition.
If, as a
result of the risks outlined above, our operating results falter and our cash
flow or capital resources prove inadequate, we could face liquidity problems
that could have a material adverse effect on our business, financial condition
or results of operations.
THE
HOLDERS OF OUR SERIES A-1 SENIOR PREFERRED STOCK HAVE SIGNIFICANT INFLUENCE ON
OUR MAJOR CORPORATE DECISIONS AND COULD TAKE ACTIONS THAT COULD BE ADVERSE TO
YOU
Holders
of our Series A-1 Senior Preferred Stock have the right to appoint a majority of
our Board of Directors. In addition, each share of Series A-1 Preferred Stock
entitles the holder to such number of votes as shall equal the number of shares
of common stock issuable upon exercise of the Class A Warrants held by such
holder as of the applicable record date. Following the increase in the number of
authorized shares of common stock, as anticipated by the Company’s agreement
with the holders of Series A-1 Preferred Stock, we anticipate that the holders
of our Series A-1 Preferred Stock will hold a majority of the outstanding voting
equity of the Company. In addition, holders of our Series A-1 Preferred Stock
have the right to approve certain corporate actions.
As a
result, holders of our Series A-1 Preferred Stock have significant influence
over us, our management, our policies and on all matters requiring shareholder
approval. The ability of the holders of our Series A-1 Preferred Stock to
influence certain of our major corporate decisions may harm the market price for
our common stock by delaying, deferring, or preventing transactions that are in
the best interests of all shareholders or discouraging third-party
investors.
14
THE
ISSUANCE OF COMMON STOCK TO THE HOLDERS OF THE CLASS A WARRANTS AND CLASS B
WARRANTS OR THE SALE OF OUR COMMON STOCK BY SUCH HOLDERS COULD LOWER THE MARKET
PRICE OF OUR COMMON STOCK
The
holders of our Class A Warrants and Class B Warrants have the right to acquire,
immediately following the increase in the number of authorized shares of our
common stock, as anticipated by the Company’s agreement with the holders of
Series A-1 Preferred Stock, approximately 75.9% of the fully-diluted common
stock of the Company. The issuance of these shares upon exercise of the Class A
Warrants and Class B Warrants will decrease the ownership percentage of current
outstanding shareholders and may result in a decrease in the market price of our
common stock.
Additionally,
the offer, sale, disposition, or consummation of other such transactions
involving substantial amounts of our common stock held by the holders of our
Class A Warrants, Class B Warrants, or other significant shareholders could
result in a decrease of the market price of our common stock, particularly if
such offers, sales, dispositions or transactions occur simultaneously or
relatively close in time.
WE MAY
HAVE DIFFICULTY IDENTIFYING AND EXECUTING FUTURE ACQUISITIONS ON FAVORABLE
TERMS, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND STOCK
PRICE
We cannot
ensure that we will be able to identify and execute acquisitions in the future
on terms that are favorable to us, or at all. One of our key growth strategies
is to selectively pursue acquisitions. Through acquisitions, we plan to expand
our base of federal government clients, increase the range of solutions we offer
to our clients, and deepen our penetration of existing clients. Without
acquisitions, we may not grow as rapidly as the market expects, which could
cause our actual results to differ materially from those anticipated. We may
encounter other risks in executing our acquisition strategy,
including:
·
|
Increased
competition for acquisitions which may increase the price of our
acquisitions;
|
·
|
Our
failure to discover material liabilities during the due diligence process,
including the failure of prior owners of any acquired businesses or their
employees to comply with applicable laws, such as the Federal Acquisition
Regulation and health, safety, employment, and environmental laws, or
their failure to fulfill their contractual obligations to the federal
government or other clients; and
|
·
|
Acquisition
financing may not be available on reasonable terms, or at
all.
|
In
connection with any future acquisitions, we may decide to consolidate the
operations of any acquired business with our existing operations or to make
other changes with respect to the acquired business, which could result in
special charges or other expenses. Our results of operations also may be
adversely affected by expenses we incur in making acquisitions and, in the event
that any goodwill resulting from present or future acquisitions is found to be
impaired, by goodwill impairment charges.
In
addition, our ability to make future acquisitions may require us to obtain
additional financing. To the extent that we seek to acquire other businesses in
exchange for our common stock, fluctuations in our stock price could have a
material adverse effect on our ability to complete acquisitions and the issuance
of common stock to acquire other businesses could be dilutive to our
stockholders. To the extent that we use borrowings to acquire other businesses,
our debt service obligations could increase substantially and relevant debt
instruments may, among other things, impose additional restrictions on our
operations, require us to comply with additional financial covenants or require
us to pledge additional assets to secure our borrowings.
Any
future acquisitions we make could disrupt our business and seriously harm our
financial condition. We intend to consider investments in complementary
companies, products and technologies. We anticipate buying businesses, products
and/or technologies in the future in order to fully implement our business
strategy. In the event of any future acquisitions, we may:
·
|
Issue
stock that would dilute our current stockholders’ percentage
ownership;
|
·
|
Incur
debt;
|
·
|
Assume
liabilities;
|
·
|
Incur
amortization expenses related to intangible assets;
and
|
·
|
Incur
significant write-offs or restructuring charges to integrate and operate
the acquired business.
|
15
The use
of debt or leverage to finance our future acquisitions may allow us to make
acquisitions with an amount of cash in excess of what may be currently available
to us. If we use debt to leverage up our assets, we may not be able to meet our
debt obligations if our internal projections are incorrect or if there is a
market downturn. This may result in a default and the loss in foreclosure
proceedings of the acquired business and have a material adverse affect on our
business.
Our
operation of any acquired business will also involve numerous risks,
including:
·
|
Integration
of the operations of the acquired business and its technologies or
products;
|
·
|
Unanticipated
costs;
|
·
|
Diversion
of management’s attention from our core
business;
|
·
|
Adverse
effects on existing business relationships with suppliers and
customers;
|
·
|
Risks
associated with entering markets in which we have limited prior
experience; and
|
·
|
Potential
loss of key employees, particularly those of the purchased
organizations.
|
The
success of our acquisition strategy will depend upon our ability to successfully
integrate any businesses we may acquire in the future. The integration of these
businesses into our operations may result in unforeseen events or operating
difficulties, absorb significant management attention and require significant
financial resources that would otherwise be available for the ongoing
development of our business. These integration difficulties could include the
integration of personnel with disparate business backgrounds, the transition to
new information systems, coordination of geographically dispersed organizations,
loss of key employees of acquired companies and reconciliation of different
corporate cultures. For these or other reasons, we may be unable to retain key
clients or to retain or renew contracts of acquired companies. Moreover, any
acquired business may fail to generate the revenue or net income we expected or
produce the efficiencies or cost-savings that we anticipated. Any of these
outcomes could materially adversely affect our operating results.
FAILING
TO MAINTAIN STRONG RELATIONSHIPS WITH PRIME CONTRACTORS COULD RESULT IN A
DECLINE IN OUR REVENUE
We
derived approximately 52% of our revenue during the year ended December 31, 2009
through our subcontractor relationships with prime contractors, which, in turn,
hold the prime contract with end-clients. We project over the next few years the
percentage of subcontractor revenue will increase significantly. If any of these
prime contractors eliminate or reduce their engagements with us, or have their
engagements eliminated or reduced by their end-clients, we will lose this source
of revenue, which, if not replaced, could adversely affect our operating
results.
OUR
RELATIVELY FIXED OPERATING EXPENSES EXPOSE US TO GREATER RISK OF INCURRING
LOSSES
We incur
costs based on our expectations of future revenue. Our operating expenses are
relatively fixed and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of engagements in progress. These
factors make it difficult for us to predict our operating results. If we fail to
predict our revenue accurately, it may materially adversely harm our financial
condition.
A
REDUCTION IN OR THE TERMINATION OF OUR SERVICES COULD LEAD TO UNDERUTILIZATION
OF OUR EMPLOYEES AND COULD HARM OUR OPERATING RESULTS
Our
employee compensation expenses are relatively fixed. Therefore, if a client
defers, modifies, or cancels an engagement or chooses not to retain us for
additional phases of a project, our operating results will be harmed unless we
can rapidly redeploy our employees to other engagements in order to minimize
underutilization. If we fail to redeploy our employees, we could be forced to
incur significant costs which could adversely affect our operating
results.
IF WE
EXPERIENCE DIFFICULTIES COLLECTING RECEIVABLES IT COULD CAUSE OUR ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
As of
December 31, 2009, 37% of our total assets were in the form of accounts
receivable. Thus, we depend on the collection of our receivables to generate
cash flow, provide working capital, pay debt, and continue our business
operations. As of December 31, 2009, we had unbilled receivable of $2,295,142
included in the total accounts receivable for which we are awaiting
authorization to invoice. If the federal government, any of our other clients,
or any prime contractor for whom we are a subcontractor does not authorize us to
invoice or fails to pay or delays the payment of their outstanding invoices for
any reason, our business and financial condition may be materially adversely
affected. The government may fail to pay outstanding invoices for a number of
reasons, including a reduction in appropriated funding, lack of appropriated
funds, or lack of an approved budget.
16
SECURITY
BREACHES IN SENSITIVE GOVERNMENT SYSTEMS COULD RESULT IN THE LOSS OF CLIENTS AND
NEGATIVE PUBLICITY
Some of
the systems we develop involve managing and protecting information involved in
sensitive government functions. A security breach in one of these systems could
result in negative publicity and could prevent us from having further access to
such critically sensitive systems or other similarly sensitive areas for other
government clients, which could force us to curtail our business operations.
Losses that we could incur from such a security breach could exceed the policy
limits under the “errors and omissions” liability insurance we currently have.
Our current coverage under the “errors and omission” liability insurance is $5
million.
IF WE
CANNOT OBTAIN THE NECESSARY SECURITY CLEARANCES, WE MAY NOT BE ABLE TO PERFORM
CLASSIFIED WORK FOR THE GOVERNMENT AND WE COULD BE FORCED TO CURTAIL OR CEASE
CLASSIFIED OPERATIONS
Government
contracts require us, and some of our employees, to maintain security
clearances. If we lose or are unable to obtain security clearances, the client
can terminate the contract or decide not to renew it upon its expiration. As a
result, if we cannot obtain the required security clearances for our employees
working on a particular engagement, we may not derive the revenue anticipated
from the engagement, which, if not replaced with revenue from other engagements,
could force us to curtail our business operations.
WE MUST
RECRUIT AND RETAIN QUALIFIED PROFESSIONALS TO SUCCEED IN OUR LABOR INTENSIVE
BUSINESS
Our
future success depends in large part on our ability to recruit and retain
qualified professionals skilled in complex information technology services and
solutions. Such personnel as Java developers and other hard-to-find information
technology professionals are in great demand and are likely to remain a limited
resource in the foreseeable future. Competition for qualified professionals is
intense. Any inability to recruit and retain a sufficient number of these
professionals could hinder the growth of our business. The future success of
Paradigm will depend on our ability to attract, train, retain, and motivate
direct sales, customer support and highly skilled management and technical
employees. We may not be able to successfully employ the appropriate level of
direct sales personnel, which would limit our ability to expand our customer
base. Further, we may not be able to hire highly trained consultants and support
engineers which would make it difficult to meet our clients’ demands. If we
cannot successfully identify and integrate new employees into our business, we
will not be able to manage our growth effectively. Because a significant
component of our growth strategy relates to increasing our revenue from sales of
our services and software, our growth strategy will be adversely affected if we
are unable to develop and maintain an effective sales force to market our
services to our federal customers. Our effort to build and maintain an effective
sales force may not be successful and, therefore, we could be forced to cut back
on our growth strategy.
WE DEPEND
ON OUR SENIOR MANAGEMENT TEAM, AND THE LOSS OF ANY MEMBER MAY ADVERSELY AFFECT
OUR ABILITY TO OBTAIN AND MAINTAIN CLIENTS
We
believe that our success depends on the continued employment of our senior
management team of Peter LaMontagne, President and Chief Executive Officer and
Richard Sawchak, Senior Vice President and Chief Financial Officer. We have key
executive life insurance policies for Mr. LaMontagne and Mr. Sawchak for up to
$1 million. Their employment is particularly important to our business because
personal relationships are a critical element of obtaining and maintaining
client engagements. If one or more members of our senior management team were
unable or unwilling to continue in their present positions, such persons would
be difficult to replace and our business could be seriously harmed. Furthermore,
clients or other companies seeking to develop in-house capabilities may attempt
to hire some of our key employees. Employee defections to clients or competitors
would not only result in the loss of key employees but could also result in the
loss of a client relationship or a new business opportunity.
AUDITS OF
OUR GOVERNMENT CONTRACTS MAY RESULT IN A REDUCTION IN THE REVENUE WE RECEIVE
FROM THOSE CONTRACTS OR MAY RESULT IN CIVIL OR CRIMINAL PENALTIES THAT COULD
HARM OUR REPUTATION
17
Federal
government agencies routinely audit government contracts. These agencies review
a contractor’s performance on its contract, pricing practices, cost structure,
and compliance with applicable laws, regulations and standards. An audit could
result in a substantial adjustment to our revenue because any cost found to be
improperly allocated to a specific contract will not be reimbursed, while
improper costs already reimbursed must be refunded. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension and
debarment from doing business with federal government agencies. If any or all of
these allegations were made against us, we could be forced to curtail or cease
our business operations.
WE MAY BE
LIABLE FOR PENALTIES UNDER A VARIETY OF PROCUREMENT RULES AND REGULATIONS, AND
CHANGES IN GOVERNMENT REGULATIONS COULD SLOW OUR GROWTH OR REDUCE OUR
PROFITABILITY
We must
comply with and are affected by federal government regulations relating to the
formation, administration, and performance of government contracts. These
regulations affect how we do business with our clients and may impose added
costs on our business. Any failure to comply with applicable laws and
regulations could result in contract termination, price or fee reductions, or
suspension or debarment from contracting with the federal government, which
could force us to curtail our business operations. Further, the federal
government may reform its procurement practices or adopt new contracting methods
relating to the GSA Schedule or other government-wide contract vehicles. If we
are unable to successfully adapt to those changes, our business could be
seriously harmed.
OUR
FAILURE TO ADEQUATELY PROTECT OUR CONFIDENTIAL INFORMATION AND PROPRIETARY
RIGHTS MAY HARM OUR COMPETITIVE POSITION
While our
employees execute confidentiality agreements, we cannot guarantee that this will
be adequate to deter misappropriation of our confidential information. In
addition, we may not be able to detect unauthorized use of our intellectual
property in order to take appropriate steps to enforce our rights. If third
parties infringe or misappropriate our copyrights, trademarks, or other
proprietary information, our competitive position could be seriously harmed,
which could force us to curtail our business operations. In addition, other
parties may assert infringement claims against us or claim that we have violated
their intellectual property rights. Such claims, even if not true, could result
in significant legal and other costs and may be a distraction to
management.
RISKS
RELATED TO THE INFORMATION TECHNOLOGY SOLUTIONS AND SERVICES MARKET COMPETITION
COULD RESULT IN PRICE REDUCTIONS, REDUCED PROFITABILITY, AND LOSS OF MARKET
SHARE
Competition
in the federal marketplace for information technology solutions and services is
intense. If we are unable to differentiate our offerings from those of our
competitors, our revenue growth and operating margins may decline, which would
harm our business operations. Many of our competitors are larger and have
greater financial, technical, marketing, and public relations resources, larger
client bases, and greater brand or name recognition than Paradigm. Our larger
competitors may be able to provide clients with additional benefits, including
reduced prices. We may be unable to offer prices at those reduced rates, which
may cause us to lose business and market share. Alternatively, we could decide
to offer the lower prices, which could harm our profitability. If we fail to
compete successfully, our business could be seriously harmed and our
profitability could be adversely affected.
Our
current competitors include, and may in the future include, information
technology services providers and large government contractors such as
Pragmatics, Booz Allen & Hamilton, Computer Sciences Corporation, RSIS, SRA,
ATS, Electronic Data Systems, Science Applications International Corporation,
and Lockheed Martin.
Current
and potential competitors have also established or may establish cooperative
relationships among themselves or with third parties to increase their ability
to address client needs. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. In addition, some of our competitors may develop services that are
superior to, or have greater market acceptance than, the services that we
offer.
18
OUR
COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
Our
common stock is traded on the Over-the-Counter Bulletin Board. There has been a
limited public market for our common stock and there can be no assurance that an
active trading market for our common stock will develop. As a result, this could
adversely affect our shareholders’ ability to sell our common stock in short
time periods, or possibly at all. Our common stock is thinly traded compared to
larger, more widely known companies in the information technology services
industry. Thinly traded common stock can be more volatile than common stock
traded in an active public market. The average daily trading volume of our
common stock for the year ended December 31, 2009 was 4,475 shares per day. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
QUARTERLY
REVENUE AND OPERATING RESULTS COULD BE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE
The rate
at which the federal government procures technology may be negatively affected
by new presidential administrations and senior government officials. As a
result, our operating results could be volatile and difficult to predict, and
period-to-period comparisons of our operating results may not be a good
indication of our future performance.
A
significant portion of our operating expenses, such as personnel and facilities
costs, are fixed in the short term. Therefore, any failure to generate revenue
according to our expectations in a particular quarter could result in reduced
income in the quarter. In addition, our quarterly operating results may not meet
the expectations of investors, which in turn may have an adverse affect on the
market price of our common stock.
IF PENNY
STOCK REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK,
THE ABILITY OF OUR SHAREHOLDERS TO SELL SHARES OF OUR STOCK COULD BE
IMPAIRED
The SEC
has adopted regulations that generally define a "penny stock" to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share subject to certain exceptions. Exceptions
include equity securities issued by an issuer that has (i) net tangible assets
of at least $2,000,000, if such issuer has been in continuous operation for more
than three years, or (ii) net tangible assets of at least $5,000,000, if such
issuer has been in continuous operation for less than three years, or (iii)
average revenue of at least $6,000,000 for the preceding three years. Our common
stock is currently trading at under $5.00 per share. Although we currently fall
under one of the exceptions, if at a later time we fail to meet one of the
exceptions, our common stock will be considered a penny stock. Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements, among others, may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
INVESTORS
SHOULD NOT RELY ON AN INVESTMENT IN OUR COMMON STOCK FOR THE PAYMENT OF CASH
DIVIDENDS
We have
not paid any cash dividends on our common stock and we do not anticipate paying
cash dividends in the future on our common stock. Investors should not make an
investment in our common stock if they require dividend income. Any return on an
investment in our common stock will be as a result of any appreciation, if any,
in our stock price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not
applicable.
19
ITEM 2.
PROPERTIES
Our
principal offices are located at the following locations:
Location
|
Square Feet
|
Monthly Rent
|
Expiration Date
|
||||||
9715
Key West Avenue, Third Floor, Rockville, Maryland, 20850 (a)
|
15,204 | $ | 32,882 |
May
31, 2012
|
|||||
2600
Tower Oaks Boulevard, Suite 500, Rockville, Maryland 20852
(a)
|
14,318 | $ | 38,744 |
May
31, 2011
|
|||||
2424
West Vista Way, suite 204, Oceanside, CA 92054 (b, c)
|
2,127 | $ | 4,106 |
November
30, 2010
|
|||||
1420
Spring Hill Road, suite 420, McLean, VA 22102 (b)
|
6,139 | $ | 11,629 |
April
30,
2009
|
(a)
|
We
moved our Headquarters from 2600 Tower Oaks Boulevard, Suite 500,
Rockville, Maryland 20852 to 9715
Key West Avenue, Third Floor, Rockville, Maryland 20850 in June 2006. We
subleased two-thirds of the Key West Avenue facility in February 2010 and
subleased the entire Tower Oaks Boulevard facility in June 2006. The
monthly rent is $16,234 and $37,905,
respectively.
|
(b)
|
These
facilities were assumed in connection with the Trinity and CTS
acquisitions and are used for general business
purposes.
|
(c)
|
As
part of our acquisition and integration plan, we subleased the West Vista
Way facility in March 2008.
|
Management
believes our principal office located at 9715 Key West Avenue in Rockville,
Maryland is adequate for our current needs.
ITEM 3.
LEGAL PROCEEDINGS
On April
8, 2009, Samuel Caldwell and Zulema Caldwell, former owners of Caldwell
Technology Solutions, LLC (“CTS”), initiated an action against the Company in
Montgomery County Circuit Court, Maryland, alleging claims arising out of the
Company’s purchase of CTS in July 2007. Specifically, the complaint alleges that
the Company breached the Purchase Agreement dated June 6, 2007 among the
Company, CTS and Mr. and Mrs. Caldwell (the “Purchase Agreement”) by failing to
pay “earn-out” compensation pursuant to the terms of the Purchase Agreement. The
complaint alleges that if certain revenue and profits metrics had been met by
CTS in the first 12 months following its acquisition by the Company, Mr. and
Mrs. Caldwell would have been entitled to receive the maximum earn-out
compensation of $2,540,000 (which the Purchase Agreement provides was payable in
cash and shares of the Company’s common stock) under the Purchase Agreement as
opposed to the $165,000 in cash and $254,000 in shares of the Company’s common
stock paid to Mr. and Mrs. Caldwell by the Company. The complaint further
alleges that such metrics were met or would have been met had it not been for
interference by the Company and non-GAAP-based accounting on the part of the
Company.
In
addition to the breach of contract claim, the complaint also includes (i) a
claim of fraud, based on the allegation that the Company made misrepresentations
when it entered into the Purchase Agreement regarding the accounting that would
determine payment of the earn-out; (ii) a request for a legal “accounting” of
the Company’s books; (iii) a request for pre-judgment attachment of the
Company’s assets in the State of Maryland, and (iv) a request that the court
issue a declaratory judgment invalidating a non-competition agreement entered
into by Mr. Caldwell as part of the CTS transaction. In addition to the alleged
contract damages of $2,540,000 (less amounts previously paid to Mr. and Mrs.
Caldwell as earn-out compensation), under their fraud claim, Mr. and Mrs.
Caldwell seek $6,000,000 in punitive damages.
The
Company filed its answer and a counter-claim for breach of contract and fraud
for undisclosed IRS liabilities, accounts receivable, disclosure of proprietary
information, conversion of IRS checks and corporate credit cards, and unjust
enrichment relating to certain payments made by the Company on behalf of the
plaintiffs, in amounts to be determined at trial. Plaintiffs answer to the
Company’s counterclaim was filed in early October. A schedule has been set by
the court with a deadline for completing discovery of April 30, 2010; however,
the parties recently filed a joint motion seeking for an extension of the
discovery period to July 31, 2010. The Company intends to vigorously defend the
allegations in the complaint and pursue its counter-claims; however, it is
difficult to predict the final outcome of the respective claims of the
parties.
ITEM 4.
(REMOVED AND RESERVED)
20
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“PDHO”.
Set forth
below is a table summarizing the high and low bid quotations for our common
stock during the last two fiscal years. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. All historical data was obtained from
www.otcbb.com.
YEAR
2009
|
High
Price
|
Low
Price
|
||||||
Quarter
Ended December 31, 2009
|
$ | 0.08 | $ | 0.04 | ||||
Quarter
Ended September 30, 2009
|
$ | 0.20 | $ | 0.04 | ||||
Quarter
Ended June 30, 2009
|
$ | 0.20 | $ | 0.07 | ||||
Quarter
Ended March 31, 2009
|
$ | 0.07 | $ | 0.05 |
YEAR
2008
|
High
Price
|
Low
Price
|
||||||
Quarter
Ended December 31, 2008
|
$ | 0.20 | $ | 0.05 | ||||
Quarter
Ended September 30, 2008
|
$ | 0.39 | $ | 0.10 | ||||
Quarter
Ended June 30, 2008
|
$ | 0.63 | $ | 0.25 | ||||
Quarter
Ended March 31, 2008
|
$ | 1.00 | $ | 0.53 |
On March
18, 2010, we had approximately 2,700 holders of record of our common stock,
although there are more beneficial owners.
DIVIDENDS
We have
not paid any dividend on our common stock and do not anticipate paying any cash
dividend in the foreseeable future on our common stock. In addition, our credit
facility with Silicon Valley Bank (“SVB”) and the documents governing our Series
A-1 Preferred Stock restrict our ability to pay dividend on our common stock.
See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.” We cannot assure investors that we
will ever pay cash dividends on our common stock. Whether we pay any cash
dividends in the future will depend on the financial condition, results of
operations and other factors that the Board of Directors will
consider.
Equity
Compensation Plan Information
The
following table gives information about equity awards as of December 31,
2009:
Plan category
|
Number of securities to be
issued upon exercise of
outstanding
options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders (1)
|
3,117,000 | $ | 0.44 | 1,299,820 | ||||||||
Equity
compensation plans not approved by security holders (2)
|
2,735,898 | $ | 0.20 | — | ||||||||
Total
|
5,852,898 | $ | 0.33 | 1,299,820 |
21
(1)
|
Represents
(i) a total of 2,625,000 shares of restricted common stock issued to key
employees and directors and (ii) options granted to employees to acquire
492,000 shares of the Company’s common
stock.
|
(2)
|
Represents
(i) 1,050,000 shares issuable upon exercise of options granted to
employees and directors before adoption and approval of the 2006 Stock
Incentive Plan on August 3, 2006, (ii) a warrant issued to acquire 83,333
shares of the Company’s common stock to the placement agent in connection
with the sale of the Company’s Series A Preferred Stock on July 25, 2007,
and (iii) a warrant issued to acquire 1,602,565 shares of the Company’s
common stock to the placement agent in connection with the sale of the
Company’s Series A-1 Preferred Stock on February 27, 2009. The options
include (i) an option, granted to Peter LaMontagne, the Company’s
President and Chief Executive Officer on May 15, 2006, to purchase 500,000
shares of common stock, that expires on May 15, 2016, is subject to three
year vesting and has an exercise price of $0.30 per share (following the
repricing of such option as discussed elsewhere in this Annual Report on
Form 10-K) and (ii) options granted on December 15, 2005 to 11 employees
and directors to purchase an aggregate of 550,000 shares of common stock,
which expire on December 15, 2015, are fully vested and have an exercise
price of $0.30 per share (following the repricing of such option as
discussed elsewhere in this Annual Report on Form 10-K). The warrant has
an exercise price of $1.20 per share and expires on July 25,
2012.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
reader should read the following discussion in conjunction with our Consolidated
Financial Statements and related notes included elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking statements, the accuracy
of which involves risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks faced by us described in Part I, Item 1A “RISK
FACTORS”.
GENERAL
Paradigm
provides information technology (“IT”) and business continuity solutions
primarily to government customers. Headquartered in Rockville, Maryland,
Paradigm was founded based upon strong commitment to high standards of
performance, integrity, customer satisfaction, and employee
development.
With an
established core foundation of experienced executives, we have grown from six
employees in 1996 to the current level of 169 personnel (full time, part time,
and consultants). Our annual revenue was approximately $32.2 million in
2009.
As of
December 31, 2009, Paradigm was comprised of three subsidiary companies: 1)
Paradigm Solutions Corporation, which was incorporated in 1996 to deliver IT
services to federal agencies, 2) Trinity IMS, Inc. (“Trinity”), which was
acquired on April 9, 2007 to deliver IT solutions into the national security
marketplace, and 3) Caldwell Technology Solutions, LLC (“CTS”) which was
acquired on July 2, 2007 to provide advanced IT solutions in support of national
security programs within the intelligence community.
We derive
substantially all of our revenue from fees for information technology solutions
and services. We generate these fees from contracts with various payment
arrangements, including time and materials contracts, fixed-price contracts and
cost-plus contracts. We typically issue invoices monthly to manage outstanding
accounts receivable balances. We recognize revenue on time and materials
contracts as the services are provided. For the year ended December 31, 2009,
our business was comprised of approximately 56% fixed price and 44% time and
material contracts.
At the
end of December 31, 2009, contracts with the federal government and contracts
with prime contractors of the federal government accounted for 100% of our
revenue. During that same period, our three largest clients, all agencies within
the federal government, generated approximately 74% of our revenue. In most of
these engagements, we retain full responsibility for the end-client relationship
and direct and manage the activities of our contract staff.
22
Our most
significant expense is direct costs, which consist primarily of direct labor,
subcontractors, materials, equipment, travel and an allocation of indirect costs
including fringe benefits. The number of subcontract and consulting employees
assigned to a project will vary according to the size, complexity, duration and
demands of the project.
Selling,
general and administrative expenses consist primarily of costs associated with
our executive management, finance and administrative groups, human resources,
marketing and business development resources, employee training, occupancy
costs, depreciation and amortization, travel, and all other corporate
costs.
Other
income and expense consists primarily of interest income earned on our cash and
cash equivalents and interest payable on our revolving credit
facility.
DESCRIPTION
OF CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates including those related to contingent liabilities, revenue
recognition, and other intangible assets.
Management
bases its estimates on historical experience and on various other factors that
are believed to be reasonable at the time the estimates are made. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes that our critical accounting policies which require more
significant judgments and estimates in the preparation of our consolidated
financial statements are revenue recognition, costs of revenue, goodwill and
intangible assets, impairment of long-live assets, and share-based
compensation.
REVENUE
RECOGNITION
Substantially
all of the Company's revenue is derived from services and solutions provided to
the federal government by the Company’s employees and
subcontractors.
The
Company generates its revenue from three different types of contractual
arrangements: (i) time and materials contracts, (ii) cost-plus reimbursement
contracts, and (iii) fixed price contracts.
Time and
Materials (“T&M”). For T&M contracts, revenue is recognized based on
direct labor hours expended in the performance of the contract by the contract
billing rates and adding other billable direct costs.
Cost-Plus
Reimbursement (“CP”). Under CP contracts, revenue is recognized as costs are
incurred and include an estimate of applicable fees earned. For award based fees
under CP contracts, the Company recognizes the relevant portion of the expected
fee to be awarded by the client at the time such fee can be reasonably estimated
and collection is reasonably assured based on factors such as prior award
experience and communications with the client regarding
performance.
Fixed
Price (“FP”). The Company has two basic categories of FP contracts: (i) fixed
price-level of effort (“FP-LOE”) and (ii) firm fixed price (“FFP”).
·
|
Under
FP-LOE contracts, revenue is recognized based upon the number of units of
labor actually delivered multiplied by the agreed rate for each unit of
labor. Revenue on fixed unit price contracts, where specific units of
output under service agreements are delivered, is recognized as units are
delivered based on the specific price per unit. For FP maintenance
contracts, revenue is recognized on a pro-rata basis over the life of the
contract.
|
·
|
Under
FFP contracts, revenue is generally recognized subject to the provision of
the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
For those contracts that are within the scope of Accounting Standards
Codification (“ASC”) 605-35, “Revenue Recognition; Construction-Type and
Production-Type Contracts,” revenue is recognized on the
percentage-of-completion method using costs incurred in relation to total
estimated costs.
|
23
In
certain arrangements, the Company enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting. Revenue is
recognized separately in accordance with the Company's revenue recognition
policy for each element. Further, if an arrangement requires the delivery or
performance of multiple deliveries or elements under a bundled sale, the Company
determines whether the individual elements represent "separate units of
accounting" under the requirements of ASC 605-25, “Revenue Recognition; Multiple
Element Arrangements,” and allocates revenue to each element based on relative
fair value.
Software
revenue recognition for sales of OpsPlanner is in accordance with ASC 985-605,
“Software Revenue Recognition.” Since the Company has not yet established
vendor specific objective evidence of fair value for the multiple elements
typically contained within an OpsPlanner sale, revenue from the sale of
OpsPlanner is recognized ratably over the term of the contract.
In
certain contracts, revenue includes third-party hardware and software purchased
on behalf of clients. The level of hardware and software purchases made for
clients may vary from period to period depending on specific contract and client
requirements. The Company recognizes the gross revenue under ASC 605-45,
“Revenue Recognition; Principal Agent Considerations,” for certain of its
contracts which contain third-party products and services, because in those
contracts, the Company is contractually bound to provide a complete solution
which includes labor and additional services in which the Company maintains
contractual, technical and delivery risks for all services and agreements
provided to the customers, and the Company may be subject to financial penalties
for non-delivery.
The
Company is subject to audits from federal government agencies. The Company has
reviewed its contracts and determined there is no material risk of any
significant financial adjustments due to government audit. To date, the Company
has not had any adjustments as a result of a government audit of its
contracts.
Revenue
recognized on contracts for which billings have not yet been presented to
customers is included in unbilled receivables.
Deferred
revenue relates to contracts for which customers pay in advance for services to
be performed at a future date. The Company recognizes deferred revenue
attributable to its software and maintenance contracts over the related service
periods.
COST OF
REVENUE
Our costs
are categorized as cost of revenue or selling, general and administrative
expenses. Cost of revenue are those that can be identified with and allocated to
specific contracts and tasks. They include labor, subcontractor costs,
consultant fees, travel expenses, materials and an allocation of indirect costs.
Indirect costs consist primarily of fringe benefits (vacation time,
medical/dental, 401K plan matching contribution, tuition assistance, employee
welfare, worker’s compensation and other benefits), intermediate management and
certain other non-direct costs which are necessary to provide direct labor.
Indirect costs, to the extent that they are allowable, are allocated to
contracts and tasks using appropriate government-approved methodologies. Costs
determined to be unallowable under the Federal Acquisition Regulations cannot be
allocated to projects. Our principal unallowable costs are interest expense and
certain general and administrative expenses. Cost of revenue is considered to be
a critical accounting policy because it inherently involves estimation on our FP
contracts. Examples of such estimates include the level of effort needed to
accomplish the tasks under the contract, the cost of those efforts, and a
continual assessment of our progress toward the completion of the contract. From
time to time, circumstances may arise which require us to revise our estimated
total costs.
ASSUMPTIONS
RELATED TO PURCHASE ACCOUNTING AND GOODWILL AND INTANGIBLE ASSETS
We
account for our acquisitions using the purchase method of accounting. This
method requires estimates to determine the fair value of assets and liabilities
acquired, including judgments to determine any acquired intangible assets such
as contract-related intangibles, as well as assessments of the fair value of
existing assets such as property and equipment. Liabilities acquired can include
balances for litigation and other contingency reserves established prior to or
at the time of acquisition, and require judgment in ascertaining a reasonable
value. Third party valuation firms may be used to assist in the appraisal of
certain assets and liabilities, but even those determinations would be based on
significant estimates provided by us, such as forecasted revenues or profits on
contract-related intangibles. Numerous factors are typically considered in the
purchase accounting assessments, which are conducted by Company professionals
from legal, finance, human resources, information systems, program management
and other disciplines. Changes in assumptions or estimates of the acquired
assets and liabilities would result in changes to the fair value, resulting in
an offsetting change to the goodwill balance associated with the business
acquired.
24
Pursuant
to ASC 350, “Intangibles-Goodwill and Other,” goodwill and intangible assets
with indefinite lives are not amortized, but instead are tested for impairment
at least annually. ASC 350-30 also requires that identifiable intangible assets
with estimable useful lives be amortized over their estimated useful lives, and
reviewed for impairment in accordance with ASC 360-10, “Property, Plant, and
Equipment.” We conduct a review for impairment of goodwill and intangible assets
recorded in the operations at least annually. Additionally, on an interim basis,
the Company assesses the impairment of goodwill and intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors that the Company considers important which could trigger an
impairment review include significant underperformance relative to historical or
expected future operating results significant changes in the manner or use of
the acquired assets or the strategy for the overall business, significant
negative industry or economic trends or a decline in a company's stock price for
a sustained period. Goodwill and intangible assets are subject to impairment to
the extent the Company's operations experience significant negative results.
These negative results can be the result of the Company's individual operations
or negative trends in the Company's industry or in the general economy, which
impact the Company. To the extent the Company's goodwill and intangible assets
are determined to be impaired then these balances are written down to their
estimated fair value on the date of the determination.
For the
annual goodwill impairment assessment, the Company used both the income approach
(i.e., discounted cash flow method) and the market approach (i.e., the guideline
public company method and the merger and acquisition method) to value its
reporting unit. The discounted cash flow method consists of discounting
long-term projected future cash flows, which are derived from internal forecasts
and economic expectations for the respective reporting unit. The projected
future cash flows are discounted using the weighted average cost of capital,
which is calculated by weighting the required returns on interest-bearing debt
and equity in proportion to their estimated percentages. The guideline public
company method applies a market multiple, based on eight similar public
companies, to the projected EBITDA (earnings before interest, income taxes,
depreciation and amortization) of the Company for the fiscal years ending
December 31, 2010 and 2011. The guideline merged and acquired company method
applies a market multiple, based on twenty seven (27) recently observed
transactions within the Company’s peer group, to the Company’s projected 2010
and 2011 EBITDA results. The Company weighted the three valuation methods
equally to determine the fair value of its reporting unit, which is
approximately $1.8 million above the carrying value. The Company does not
believe that by weighting the three methods differently, the conclusion would
have yielded a different result as the values from all three methods were
similar.
As an
overall test of the reasonableness of the estimated fair value of the reporting
unit, the Company reconciled the fair value estimates to its market
capitalization as of December 31, 2009. The reconciliation confirmed that the
fair value was reasonably representative of market views when applying a
reasonable control premium of 10% to the average market capitalization during
December 2009.
Even
though the analysis as of December 31, 2009 indicated that no impairment exists,
future impairment reviews may result in the recognition of such impairment if
the Company experiences a further significant decline in the stock price, a
significant decline in expected future cash flows, or a significant adverse
change in growth rates.
IMPAIRMENT
OF LONG-LIVED ASSETS
Pursuant
to ASC 360, the Company periodically evaluates the recoverability of its
long-lived assets. This evaluation consists of a comparison of the carrying
value of the assets with the assets’ expected future cash flows, undiscounted
and without interest costs. Estimates of expected future cash flows represent
management’s best estimate based on reasonable and supportable assumptions and
projections. If the expected future cash flow, undiscounted and without interest
charges, exceeds the carrying value of the asset, no impairment is recognized.
Impairment losses are measured as the difference between the carrying value of
long-lived assets and their fair market value, based on discounted future cash
flows of the related assets.
SHARE-BASED
COMPENSATION
The
Company has used stock options and restricted common stock to attract, retain,
and reward employees for long-term service. The Company did not grant any stock
options or restricted stock during fiscal year 2009. The following assumptions
were used for option grants during the year ended December 31,
2008:
Dividend
Yield - The Company has never declared or paid dividends on its common stock and
has no plans to do so in the foreseeable future.
Risk-Free
Interest Rate - Risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term approximating the expected life of the option term
assumed at the date of grant.
25
Expected
Volatility - Volatility is a measure of the amount by which a financial variable
such as a share price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The expected volatility is
based on historical volatility of the Company's common stock for the periods
that it has been publicly traded.
Expected
Term of the Options - This is the period of time that the options granted are
expected to remain unexercised. The Company estimates the expected life of the
option term based on an estimated average life of the options granted. Due to
the lack of historical information, the Company estimated the expected life of
six years for options granted during 2007, using the safe harbor criteria of SEC
SAB No. 107, “Share-Based Payments.” Effective
January 1, 2008, the Company estimated the expected life based on the reported
data for a peer group of publicly traded companies for which historical
information was available.
Forfeiture
Rate - The Company estimates the percentage of options granted that are expected
to be forfeited or canceled on an annual basis before stock options become fully
vested. The Company uses the forfeiture rate that is a blend of past turnover
data and a projection of expected results over the following twelve month period
based on projected levels of operations and headcount levels at various
classification levels with the Company.
As of
December 31, 2009, there was $0.7 million of total unrecognized compensation
costs related to nonvested stock option arrangements granted during fiscal years
2006, 2007 and 2008 and nonvested restricted common stock issued during fiscal
years 2007 and 2008. The cost is to be recognized over a weighted average period
of 0.8 years for the stock options and 2.3 years for the restricted common
stock.
The
Company follows the provisions of ASC 718, “Compensation-Stock
Compensation,” to
account for share-based compensation and uses the Black-Scholes option pricing
models for share-based awards.
Refer to
Notes 1 and 14 of the Notes to Consolidated Financial Statements for a further
discussion of the Company’s share-based awards.
VALUATION
OF WARRANTS
The
Company accounts for the issuance of common stock purchase warrants in
accordance with the provisions of ASC 815-40. The Class A Warrants and Class B
Warrants issued in connection with the sale of the Company’s Series A-1
Senior Preferred Stock, par value $0.01 per share (the “Series A-1 Preferred
Stock”), contain a provision that could require cash settlement and that event
is outside the control of the Company, and therefore are classified as a
liability as of December 31, 2009. The Company assesses classification of put
warrants at each reporting date to determine whether a change in classification
is required. The Company values put warrants using the Black-Scholes valuation
model. Put warrants are valued upon issuance, and re-valued at each financial
statement reporting date. Any change in value is charged to other income or
expense during the period.
ESTIMATES
USED TO DETERMINE INCOME TAX EXPENSE
We make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which principally arise from differences in
the timing of recognition of revenue and expense for tax and financial statement
purposes. We also must analyze income tax reserves, as well as determine the
likelihood of recoverability of deferred tax assets, and adjust any valuation
allowances accordingly. Considerations with respect to the recoverability of
deferred tax assets include the period of expiration of the tax asset, planned
use of the tax asset, and historical and projected taxable income as well as tax
liabilities for the tax jurisdiction to which the tax asset relates. Valuation
allowances are evaluated periodically and will be subject to change in each
future reporting period as a result of changes in one or more of these factors.
Uncertain tax benefits are evaluated and recorded based on the guidance provided
in the ASC 740, “Income Taxes.”
SEGMENT
REPORTING
ASC 280,
“Segment Reporting” establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information about
operating segments in interim financial reports. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Management has concluded that the Company operates in one
segment based upon the information used by management in evaluating the
performance of its business and allocating resources and
capital.
26
RECENT
ACCOUNTING STANDARDS
New
accounting standards that have a current or future potential impact on
Paradigm’s consolidated financial statements are as follows:
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
“. This ASU requires
some new disclosures and clarifies some existing disclosure requirements about
fair value measurement as set forth in ASC Subtopic 820-10. The FASB’s objective
is to improve these disclosures and, thus, increase the transparency in
financial reporting. Specifically, ASU 2010-06 amends ASC Subtopic 820-10 to now
require a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies certain requirements of the
existing disclosures. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company is in the process of evaluating the impact the
amendments to ASC 810-10 will have on its consolidated finance
statements.
In June
2009, the FASB issued guidance to replace the calculation for determining which
entities, if any, have a controlling financial interest in a variable interest
entity (“VIE”) from a quantitative based risks and rewards calculation, to a
qualitative approach that focuses on identifying which entities have the power
to direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and, the obligation to absorb losses of
the entity or the right to receive benefits from the entity. This standard also
requires ongoing assessments as to whether an enterprise is the primary
beneficiary of a VIE (previously, reconsideration was only required upon the
occurrence of specific events), modifies the presentation of consolidated VIE
assets and liabilities, and requires additional disclosures about a company’s
involvement in VIEs. This guidance will be effective for the Company beginning
January 1, 2010. Management is currently evaluating the effect, if any,
that adoption of this standard will have on the Company’s consolidated financial
position and results of operations when it becomes effective in
2010.
Recently Adopted
Accounting Standards
In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events” (“ASU 2010-09”),
effective immediately, which amends ASC 855-10 to clarify that an SEC filer is
not required to disclose the date through which subsequent events have been
evaluated in the financial statements. The adoption of ASU 2010-09 did not
materially impact the Company’s consolidated financial statements.
On July
1, 2009, the Company adopted SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162.” This statement confirms that the FASB Accounting
Standards Codification (the “Codification”) becomes the single official source
of authoritative U.S. GAAP (other than guidance issued by the SEC),
superseding existing FASB, American AICPA, EITF, and related literature. After
that date, only one level of authoritative U.S. GAAP will exist. All other
literature will be considered non-authoritative. The Codification does not
change U.S. GAAP; instead, it introduces a new structure that is organized
in an easily accessible, user-friendly online research system. The adoption of
SFAS 168 did not have a material impact on the Company’s consolidated financial
statements.
On June
30, 2009, the Company adopted provisions of ASC 825, “Financial Instruments”,
which requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of ASC 825 did not have a material impact on the
Company’s statement of operations, financial position, or cash
flows.
On June
30, 2009, the Company adopted ASC 855, “Subsequent Events,” which establishes
general standards of accounting and disclosure for events that occur after the
balance sheet date but before the financial statements are issued. The adoption
of ASC 855 did not have a material impact on the Company’s statements of
operations, financial position, or cash flows.
27
On
January 1, 2009, the Company adopted ASC 815, “Derivatives and Hedging.” This
ASC modifies and expands the disclosure requirements for derivative instruments
and hedging activities. ASC 815 requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires quantitative disclosures about fair value amounts and
gains and losses on derivative instruments. It also requires disclosures about
credit-related contingent features in derivative agreements. The adoption of ASC
815 did not have a material impact on the Company’s statements of operations,
financial position or cash flows.
On
January 1, 2009, the Company adopted ASC 810, “Consolidation.” This ASC
establishes the accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
adoption of ASC 810 did not have a material impact on the Company’s statements
of operations, financial position or cash flows.
On
January 1, 2009, the Company adopted ASC 805, “Business Combinations.” This ASC
establishes principles and requirements for how the acquirer recognizes and
measures the identifiable assets acquired, the goodwill acquired, the
liabilities assumed and any noncontrolling interest in the acquiree and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The adoption of ASC 805 did not have a material impact on the
Company’s statements of operations, financial position or cash flows. The
Company will apply ASC 805 to its future acquisitions, if any.
RESULTS
OF OPERATIONS
The
following table sets forth the relative percentages that certain items of
expense and earnings bear to revenue.
Consolidated
Statements of Operations Years Ended December 31, 2009 and 2008
Years
Ended December 31,
|
||||||||||||||||
(in
thousands, except the percentages)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Statements
of operations data:
|
||||||||||||||||
Contract
revenue
|
$ | 32,176 | $ | 39,141 | 100.0 | % | 100.0 | % | ||||||||
Cost
of revenue
|
25,021 | 31,095 | 77.8 | 79.4 | ||||||||||||
Gross
margin
|
7,155 | 8,046 | 22.2 | 20.6 | ||||||||||||
Selling,
General & Administrative
|
7,059 | 8,126 | 21.9 | 20.8 | ||||||||||||
Income
(loss) from operations
|
96 | (80 | ) | 0.3 | (0.2 | ) | ||||||||||
Total
other expense
|
(1,454 | ) | (1,039 | ) | (4.5 | ) | (2.7 | ) | ||||||||
Benefit
for income taxes
|
(85 | ) | (342 | ) | (0.2 | ) | (0.9 | ) | ||||||||
Net
loss
|
$ | (1,273 | ) | $ | (777 | ) | (4.0 | )% | (2.0 | )% |
The table
below sets forth the service mix in revenue with related percentages of total
revenue.
Years
Ended December 31,
|
||||||||||||||||
(in
thousands, except the percentages)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Federal
service contracts
|
$ | 23,273 | $ | 27,686 | 72.5 | % | 70.7 | % | ||||||||
Federal
repair & maintenance contracts
|
8,903 | 11,455 | 27.5 | % | 29.3 | % | ||||||||||
Total
revenue
|
$ | 32,176 | $ | 39,141 | 100.0 | % | 100.0 | % |
YEAR
ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008
Revenue.
For the year ended December 31, 2009, revenue decreased 17.8% to $32.2 million
from $39.1 million for the same period in 2008. The decrease in revenue is
attributable to the completion of two of our federal service contracts during
the second half of 2008 and a decrease in our federal repair and maintenance
contracts business. The decrease in repair and maintenance business is
attributable to a reduction in revenue on one federal contract due to a
reduction in scope. We expect our current lower revenue run-rate to be
reflective of near-term anticipated results.
28
Cost of
Revenue. Cost of revenue includes direct labor, materials, subcontractors and an
allocation for indirect costs. Generally, changes in cost of revenue correlate
to fluctuations in revenue as resources are consumed in the production of that
revenue. For the year ended December 31, 2009, cost of revenue decreased by
19.5% to $25.0 million from $31.1 million for the same period in 2008. The
decrease in cost of revenue was primarily attributable to the corresponding
decrease in revenue. Cost of revenue for our service business decreased $3.3
million which was primarily attributable to decrease in service business. Cost
of revenue for our repair and maintenance business decreased $2.8 million which
was primarily attributable to decrease in repair and maintenance business and
better contract management. As a percentage of revenue, cost of revenue was
77.8% for the year ended December 31, 2009 as compared to 79.4% for the year
ended December 31, 2008. The decrease in cost as a percentage of revenue
was primarily due to better contract management and better profitability on our
existing contract mix.
Gross
Margin. For the year ended December 31, 2009, gross margin decreased 11.1% to
$7.2 million from $8.0 million for the same period in 2008. Gross margin as a
percentage of revenue increased to 22.2% for the year ended December 31, 2009
from 20.6% for the year ended December 31, 2008. Gross margin as a percentage of
revenue increased due to increased repair and maintenance business margin. Gross
margin as it relates to our service business decreased 16.6% to $5.5 million
from $6.5 million for the same period in 2008. The decrease in services gross
margin is directly attributable to the decrease in revenue. Gross margin, as it
relates to our repair and maintenance business, increased 13.3% to $1.7 million
from $1.5 million for the same period in 2008. The increase in maintenance gross
margin is due to better contract management.
Selling,
General & Administrative. For the year ended December 31, 2009, selling,
general & administrative (SG&A) expenses decreased 13.1% to $7.1 million
from $8.1 million for the same period in 2008. As a percentage of revenue,
SG&A expenses increased to 21.9% for the year ended December 31, 2009 from
20.8% for the same period in 2008. The decrease in SG&A expenses is due to
the Company’s cost reduction efforts. Management will continue monitoring
SG&A expenses in 2010 to balance the impact resulting from decreased
revenues. The increase in percentage is directly attributable to the decrease in
revenue.
Other
Expense. For the year ended December 31, 2009, other expense increased to $1.5
million from $1.0 million for the same period in 2008. The increase
in other expense was primarily attributable to higher interest expense
recorded on the mandatorily redeemable Series A-1 Preferred Stock issued on
February 27, 2009 via a private placement discussed below which is partially
offset by the gain from the change in fair value of the put warrants. The
interest rates charged by SVB, our line of credit facility provider, ranged from
6.50% to 9.0% for the year ended December 31, 2009. The interest rates
charged by SVB ranged from 6.5% to 8.5% for the year ended December 31,
2008. As a percentage of revenue, other expense increased to 4.5% for the year
ended December 31, 2009 from 2.7% for the same period in 2008. The increase in
percentage is directly attributable to the decrease in revenue. We expect to
have a higher overall interest expense due to interest expense on the
mandatorily redeemable Series A-1 Preferred Stock issued on February 27, 2009
but a lower interest expense on our line of credit facility in 2009 as a result
of the trend in the interest rate market and the level of debt
outstanding. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources”
for further discussion.
Income
Taxes. For the year ended December 31, 2009, income tax benefit decreased to $85
thousand from $342 thousand for the same period in 2008. The Company’s tax
provision for the year ended December 31, 2009 and 2008 represents an estimated
annual effective tax rate, excluding discrete items, of 11.0% and 33.1%,
respectively. The decrease in estimated annual effective tax rate is due to the
interest expense on the mandatorily redeemable Series A-1 Preferred Stock and
the gain in change in fair value of warrants which are not deductible and
taxable under applicable tax laws.
Net Loss.
For the year ended December 31, 2009, net loss increased to $1.3 million from
$0.8 million for the same period in 2008. The increased net loss was due to
increase in interest expenses and gain from change in fair value of the
warrants discussed above, which was partially off-set by decreases in
SG&A expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary liquidity needs are financing our cost of operations, capital
expenditures, servicing our debt and paying dividends and redemption payments on
our preferred stock. Our sources of liquidity are existing cash, cash generated
from operations, and cash available from borrowings under our revolving credit
facility and the cash realized from the preferred stock issuance in February
2009. We have historically financed our operations through our existing cash,
cash generated from operations and cash available from borrowings under our
revolving credit facility. Based upon the current level of operations, we
believe that cash flow from operations, together with borrowings available from
our credit facility with SVB and the combination of in-process cost reductions
along with the completion of a private placement discussed below will be
adequate to meet future liquidity needs for the next twelve
months.
29
For the
year ended December 31, 2009, we generated $843 thousand in cash and cash
equivalents compared to $44 thousand for the same period in 2008.
Net cash
provided by operating activities was $0.3 million for the year ended December
31, 2009 compared to $1.4 million for the same period in 2008. Net cash provided
by operating activities decreased due to a decrease in accounts receivable and
accounts payable and accrued expenses. As of December 31, 2009, we had cash on
hand of $0.9 million.
Net loss
was $1.3 million for the year ended December 31, 2009 compared to $0.8
million for the same period in 2008. The net loss was primarily due to
pre-tax loss.
Accounts
receivable decreased by $1.4 million for the year ended December 31, 2009
compared to $2.1 million for the same period in 2008. The decrease in accounts
receivable for 2009 is attributable to lower revenue and more focused billings
and collection efforts and reclassification of $0.5 million receivable from one
customer to other non-current assets based on the payment arrangement with that
customer.
Accounts
payable decreased by $1.1 million for the year ended December 31, 2009 compared
to $0.5 million for the same period in 2008. The decrease in accounts
payable for 2009 is primarily reflective of decreased cost of revenue and
payments made to various vendors with the proceeds from the private placement
completed on February 27, 2009.
Net cash
used in investing activities was $44 thousand for the year ended December 31,
2009 compared to $116 thousand for the same period in 2008. Net cash used in
investing activities in 2009 was primarily due to the purchases of property and
equipment.
Net cash
provided by financing activities was $0.6 million for the year ended December
31, 2009 compared to $1.2 million of cash used in for the same period in 2008.
Net cash provided by financing activities in 2009 was due to proceeds from the
private placement completed on February 27, 2009 which were partially offset by
payments made to pay down the Company’s line of credit with SVB and to pay off
the promissory note issued in connection with the Company’s acquisition of
Trinity.
Private
Placement
On
February 27, 2009, the Company completed the sale, in a private placement
transaction, of 6,206 shares of Series A-1 Senior Preferred Stock (the “Series
A-1 Preferred Stock”), Class A Warrants to purchase up to an aggregate of
approximately 79.6 million shares of common stock with an exercise price equal
to $0.0780 per share (the “Class A Warrants”) and Class B Warrants to
purchase up to an aggregate of approximately 69.1 million shares of common stock
at an exercise price of $0.0858 per share (the “Class B Warrants” and together
with the Class A Warrants and the Series A-1 Preferred Stock, the ”Securities”)
to a group of investors, led by Hale Capital (the “Purchasers”). The Series A-1
Preferred Stock bears an annual dividend of 12.5%. Each share of Series A-1
Preferred Stock has an initial stated value of $1,000 per share (the “Stated
Value”). Paradigm received gross proceeds of approximately $6.2 million from the
private placement. Among the use of proceeds, $2.1 million was used to pay
off the promissory note issued in connection with the Company’s acquisition of
Trinity, the Company paid fees and transaction costs of approximately $1.1
million and the remaining $3.0 million was used to pay down debt and for general
working capital purposes.
The
annual dividend on the Series A-1 Preferred Stock accrues on a daily basis and
compounds monthly, with 40% of such dividend payable in cash and 60% of such
dividend payable by adding such amount to the Stated Value per share of the
Series A-1 Preferred Stock. The Company is generally required to make cash
dividend payments ranging from $26,000 to $29,000 a month. Based on the dividend
accrued as of December 31, 2009, the Stated Value per share as of such date was
$1,066.
30
Any
shares of Series A-1 Preferred Stock outstanding as of February 9, 2012 are to
be redeemed by the Company for their Stated Value plus all accrued but unpaid
cash dividends on such shares (the “Redemption Price”). In addition, on the
last day of each calendar month beginning February 2009 through and including
February 2010, the Company is required to redeem the number of shares of Series
A-1 Preferred Stock obtained by dividing 100% of all Excess Cash Flow (as
defined in the Certificate of Designations of Series A-1 Senior Preferred Stock
the (the “Certificate of Designations”)) with respect to such month by the
Redemption Price applicable to the shares to be redeemed. Further, on the
last day of each month beginning March 2010 through and including January 2012,
the Company shall redeem the number of shares of Series A-1 Preferred Stock
obtained by dividing the sum of $50,000 plus 50% of the Excess Cash Flow with
respect to such month by the Redemption Price applicable to the shares to be
redeemed. As of December 31, 2009, no redemptions with respect to any
Excess Cash Flow had been made in accordance with the restrictions placed by
SVB. At anytime prior to February 9, 2012, the Company may redeem shares of
Series A-1 Preferred Stock for 125% of the Stated Value of such shares plus all
accrued but unpaid cash dividends for such shares. If at anytime a Purchaser
realizes cash proceeds with respect to the Securities or common stock received
upon exercise of the Class A Warrants and Class B Warrants (together, the
“Warrants”) equal to or greater than the aggregate amount paid by the Purchaser
for the Securities plus 200% of such amount then the Company has the option to
repurchase all outstanding shares of Series A-1 Preferred Stock held by that
Purchaser for no additional consideration.
For so
long as (i) an aggregate of not less than 15% of the shares of Series A-1
Preferred Stock purchased on February 27, 2009 are outstanding, (ii) Warrants to
purchase an aggregate of not less than 20% of the shares issuable pursuant to
the Warrants on February 27, 2009 are outstanding or (iii) the Purchasers, in
the aggregate, own not less than 15% of the common stock issuable upon exercise
of all Warrants on February 27, 2009 (we refer to (i), (ii) and (iii) as the
“Ownership Threshold”), the Preferred Stock Purchase Agreement between the
Company and the Purchasers (the “Preferred Stock Purchase Agreement”) limits the
Company’s ability to offer or sell certain evidences of indebtedness or equity
or equity equivalent securities (other than certain excluded securities and
permitted issuances) without the prior consent of Hale Capital. Other than with
respect to the issuance of certain excluded securities by the Company, the
Preferred Stock Purchase Agreement further grants the Purchasers a right of
first refusal to purchase certain evidences of indebtedness, equity and equity
equivalent securities sold by the Company. The Company is further required
to use a portion of the proceeds it receives from a subsequent placement of its
securities to repurchase shares of Series A-1 Preferred Stock, Warrants and/or
shares of common stock from the Purchasers.
The
Preferred Stock Purchase Agreement and the Certificate of Designations also
contain certain affirmative and negative covenants. The affirmative
covenants include certain financial covenants, including a covenant that
provides that the Company is required to maintain gross revenues of not less
than 80% of the amount of gross revenues that had been projected by the Company
for each of its fiscal quarters. During the three months ended December 31,
2009, the Company failed to meet this gross revenue covenant. although the
covenant for the revenue amount for the calendar year 2009 was exceeded. The
Company received a covenant waiver for the three months ended December 31,
2009.
The
affirmative covenants also include a requirement that the Company file proxy
materials with the SEC and hold a shareholder meeting to approve certain
matters, including, among other things, the reincorporation of the Company into
the State of Delaware or Nevada and the approval of certain rights of the
holders of the Series A-1 Preferred Stock, no later than the dates specified in
the Preferred Stock Purchase Agreement and the Certificate of Designations. The
Company has failed to file such proxy materials or to hold such meeting within
the specified time period, and has received a waiver from Hale
Capital.
The
negative covenants require the prior approval of Hale Capital, for so long as
the Ownership Threshold is met, in order for the Company to take certain
actions, including, among others, (i) amending the Company’s Articles of
Incorporation or other charter documents, (ii) liquidating, dissolving or
winding-up the Company, (iii) merging with, consolidating with or acquiring or
being acquired by, or selling all or substantially all of its assets to, any
person, (iv) selling, licensing or transferring any capital stock or assets with
a value, individually or in the aggregate, of $100,000 or more, (v) undergoing
certain fundamental transactions, (vi) certain issuances of capital stock, (vii)
certain redemptions or dividend payments, (viii) the creation, incurrence or
assumption of certain types of indebtedness or liens, (ix) increasing or
decreasing the size of the Company’s Board of Directors and (x) appointing,
hiring, suspending or terminating the employment or materially modifying the
compensation of any executive officer.
31
The
Certificate of Designations further provides that upon the occurrence of certain
defined events of default each holder of Series A-1 Preferred Stock may elect to
require the Company to repurchase any outstanding shares of Series A-1 Preferred
Stock held by such holder for 125% of the Stated Value of such shares plus all
accrued but unpaid cash dividends for such shares payable, at the holder’s
election, in cash or Common Stock. In addition, upon the occurrence of such
event of default, the number of directors constituting the Company’s Board of
Directors will automatically increase by a number equal to the number of
directors then constituting the Board of Directors plus one and the holders of
the Series A-1 Preferred Stock are entitled to elect such additional
directors.
The
Warrants provide that in the event of certain fundamental transactions or the
occurrence of an event of default, the holder of the Warrants may cause the
Company to repurchase such Warrants for the purchase price specified therein
(the “Repurchase Price”).
In
addition, upon the occurrence of a liquidation event (including certain
fundamental transactions), the holders of the Series A-1 Preferred Stock are
entitled to receive prior and in preference to the payment of any amounts to the
holders of any other equity securities of the Company (the “Junior Securities”)
(i) 125% of the Stated Value of the outstanding shares of Series A-1 Preferred
Stock, (ii) all accrued but unpaid cash dividends with respect to such shares of
Series A-1 Preferred Stock and the (iii) Repurchase Price with respect to all
Warrants held by such holders.
In
connection with the private placement, the Company paid Noble International
Investments, Inc. (“Noble”) $100,000 and issued Noble a warrant to purchase up
to 1,602,565 shares of the Company’s common stock for an exercise price of
$0.0780 per share. Warrants issued were valued at $21 thousand, using the
Black Scholes model.
The
Company accounts for its preferred stock based upon the guidance enumerated in
ASC 480, “Distinguishing Liabilities from Equity.” The Series A-1 Preferred
Stock is mandatorily redeemable on February 9, 2012 and therefore is classified
as a liability instrument on the date of issuance. The Warrants issued in
connection with the sale of our Series A-1 Preferred Stock provide that the
holders of the Warrants may cause the Company to repurchase such Warrants for
the Repurchase Price in the event of certain fundamental transactions or the
occurrence of an event of default. The Company evaluated the Warrants pursuant
to ASC 815-40 and determined that the Warrants should be classified as
liabilities because they contain a provision that could require cash settlement
and that event is outside the control of the Company. The Warrants are required
to be measured at fair value, with changes in fair value reported in earnings as
long as the Warrants remain classified as liabilities. The initial proceeds
allocated to shares of Series A-1 Preferred Stock and the Warrants were
$4,299,274 and $1,906,726, respectively.
The
Company is amortizing the warrant discount using the effective interest rate
method over the three year term of the Series A-1 Preferred Stock. Although the
stated interest rate of the Series A-1 Preferred Stock is 12.5%, as a result of
the discount recorded for the Warrants, the effective interest rate is 26.79%.
The Company also incurred approximately $1,175,000 of costs in relation to this
transaction, which were recorded as deferred financing costs to be amortized
over the term of the Series A-1 Preferred Stock.
The
Company calculated the fair value of the Warrants at the date of issuance using
the Black-Scholes option pricing model. The change in fair value of the Warrants
issued in connection with the Series A-1 Preferred Stock from the date of
issuance to December 31, 2009, was a decrease of approximately $0.5 million from
$1.9 million as of February 27, 2009 to $1.4 million as of December 31, 2009.
This change of fair value of the Warrants was reflected as a component of other
expense within the statement of operations. For the year ended December 31,
2009, the change of fair value of the Warrants was ($0.5)
million.
32
Loan and
Security Agreement
On March
13, 2007, the Company entered into two Loan and Security Agreements with SVB,
one of which provided for a revolving credit facility of up to $10 million and
the other of which provided for a working capital line of credit of up to $12
million. SVB and the Company have agreed that the revolving credit facility has
no further force or effect. The Company continues to use the working capital
line of credit to borrow funds for working capital and general corporate
purposes. References to the Loan and Security Agreement in this description
refer to the working capital line of credit agreement. The Loan and Security
Agreement is secured by a first priority perfected security interest in any and
all properties, rights and assets of the Company, wherever located, whether now
owned or thereafter acquired or arising and all proceeds and products thereof as
described in the Loan and Security Agreement. Under the Loan and Security
Agreement, the line of credit is due on demand and interest is payable monthly
based on a floating per annum rate equal to the aggregate of the Prime Rate plus
the applicable spread which ranges from 1.00% to 2.00%, as well as other fees
and expenses as set forth more fully in the agreements. The Loan and Security
Agreement, requires the Company to maintain certain EBITDA covenants as
specified in the Loan and Security Agreement. Because the Company was not in
compliance with the EBITDA covenant at June 30, 2008, the Company and SVB
amended the Loan and Security Agreement to waive the covenant compliance for the
periods ended June 30 and July 31, 2008. On March 18, 2009, the Company and
SVB entered into a Second Loan Modification Agreement. This Second Loan
Modification Agreement amended the Loan and Security Agreement to extend the
maturity date to May 12, 2009 and modify the funds available under the working
capital line of credit facility to not exceed $4.5 million and the total funds
available under the Loan and Security Agreement to a maximum amount of $5.625
million. The interest rates and EBITDA covenant are consistent with the previous
agreement for the remainder of the extension period. On May 4, 2009, the Company
and SVB entered into a Third Loan Modification Agreement. This Third Loan
Modification Agreement amended the Loan and Security Agreement to extend the
maturity date to June 12, 2009.
On July
2, 2009, the Company and SVB entered into a Fourth Loan Modification Agreement.
The Fourth Loan Modification Agreement, among other things, (i) modified the
collateral handling fee payable by the Company, (ii) revised certain of the
Company’s representations and warranties, (iii) increased the charge to the
Company for certain inspections and audits from $750 per person per day to $850
per person per day, (iv) revised the Company’s financial covenants, (v) revised
the negative covenant regarding the Company’s ability to pay dividends or make
any distribution or payment or redeem, retire or repurchase any capital stock
without the prior consent of SVB to allow for such payments (subject to certain
restrictions) to certain holders of the Company’s Series A-1 Senior Preferred
Stock, (vi) amended the definitions of “Prime Rate”, “Applicable Rate” and
“EBITDA” and (vii) extended the maturity date to June 11, 2010.
The Loan
and Security Agreement contains events of default that include among other
things, non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties, cross default to certain other
indebtedness, bankruptcy and insolvency events, change of control and material
judgments. Upon occurrence of an event of default, SVB is entitled to, among
other things, accelerate all obligations of the Company and sell the Company’s
assets to satisfy the Company’s obligations under the Loan and Security
Agreement.
The
Company was in compliance with the EBITDA covenant set forth in Section 6.7(b)
of the Loan and Security Agreement as of the three month period ended December
31, 2009. As of December 31, 2009, the Company had $3.6 million outstanding, and
$0.9 million additional availability, under its working capital line
of credit with SVB.
Even
though the Company was in compliance with the EBITDA covenant requirement as of
December 31, 2009, it is reasonably possible that the Company may not be in
compliance in future periods if the Company cannot maintain the same levels of
profitability.
As of
December 31, 2009, 37% of the total assets were in the form of accounts
receivable, thus, the Company depends on the collection of its receivables to
generate cash flow, provide working capital, pay down debt and continue its
business operations. As of December 31, 2009, the Company had unbilled
receivables of $2.3 million included in the total accounts receivable for which
it is awaiting authorization to invoice. If the federal government, any of the
Company’s other clients or any prime contractor for whom the Company is a
subcontractor does not authorize the Company to invoice or fails to pay or
delays the payment of the Company’s outstanding invoices for any reason, the
Company’s business and financial condition may be materially adversely affected.
The government may fail to pay outstanding invoices for a number of reasons,
including a reduction in appropriated funding, lack of appropriated funds or
lack of an approved budget.
In the
event cash flows are not sufficient to fund operations at the present level and
the Company is unable to obtain additional financing, it would attempt to take
appropriate actions to tailor its activities to its available financing,
including reducing its business operations through additional cost cutting
measures and revising its business strategy. However, there can be no assurances
that the Company’s attempts to take such actions will be
successful.
33
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
consolidated financial statements are provided in Part IV, Item 15 of
this filing.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Not
applicable.
ITEM
9A(T). CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of the year ended December 31, 2009. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of December 31, 2009, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, and accumulated and communicated to the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of human error and the circumvention or overriding of
controls, material misstatements may not be prevented or detected on a timely
basis. Accordingly, even internal controls determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Furthermore, projections of any evaluation of the
effectiveness to future periods are subject to the risk that such controls may
become inadequate due to changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has assessed the effectiveness of Paradigm’s internal control over financial
reporting as of December 31, 2009 based upon the criteria set forth in a report
entitled “Internal Control—Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its assessment,
management has concluded that, as of December 31,
2009, Paradigm’s internal control over financial reporting was
effective.
34
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this Annual Report.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
have been no changes in the Company’s internal control over financial reporting
during the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
35
PART
III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth information as of December 31, 2009 with respect to
the directors and executive officers of the Company.
Name
|
Age
|
Position with the
Company
|
||
Raymond
A. Huger
|
63
|
Chairman
of the Board of Directors
|
||
Peter
B. LaMontagne
|
43
|
President,
Chief Executive Officer (“CEO”) and Director
|
||
Richard
Sawchak
|
35
|
Senior
Vice President and Chief Financial Officer
|
||
Anthony
Verna
|
43
|
Senior
Vice President, Strategy and Business Development
|
||
Robert
Boakai
|
41
|
Vice
President, Enterprise Solution
|
||
Martin
M. Hale, Jr.
|
38
|
Director
|
||
John
A. Moore
|
|
56
|
|
Director
|
Raymond
A. Huger, Chairman of the Board - Mr. Huger has served as Chairman of the Board
of the Company since 2004 and was Chief Executive Officer of the Company from
2004 to May 2006. Since 2007, Mr. Huger has served as the Chairman and Chief
Executive Officer of Paradigm Solutions International, which provides IT and
software solutions to the commercial market. Mr. Huger has more than 30 years of
experience in business management, information technology, and sales/marketing
and technical support services. He established PSC in 1991 following a
successful 25-year career with IBM, beginning as a Field Engineer and holding a
variety of challenging technical support, sales/marketing and executive
management positions. Prior to his early retirement from IBM, he was a Regional
Manager, responsible for the operations of several IBM Branch offices that
generated over $500 million dollars in annual revenue. Mr. Huger has a
Bachelor’s Degree (BA) from Bernard Baruch College and a Master’s Degree (MBA)
from Fordham University.
Mr.
Huger's Prior
Five
Year History:
|
2007
– Present, Chairman, CEO of Paradigm Solutions International
Inc.
|
|
2004
- 2006, Chairman and CEO, Paradigm Holdings,
Inc.
|
Peter B.
LaMontagne, President, CEO and Director - Mr. LaMontagne has served as
President, Chief Executive Officer and as a director of the Company since May
2006. From April 1999 to May 2006, Mr. LaMontagne served as Senior Vice
President of ManTech International Corporation, an information technology
provider to the federal government with annual revenue of approximately $1
billion. While at ManTech, he played a lead role in strategic planning,
acquisitions and execution of the company’s growth strategy, including
supporting the IPO and follow-on offering in 2002. Most recently, he served as
Senior Vice President of ManTech Information Systems and Technology where he had
profit and loss responsibility for a government wide practice area focused on
information assurance and information technology systems life cycle management.
Prior to joining ManTech, Mr. LaMontagne served as a U.S. Foreign Service
Officer, specializing in East Asian political and economic affairs. He graduated
magna cum laude from Bowdoin College in Brunswick, Maine where he majored in
Government/Legal Studies and Classics.
Mr.
LaMontagne's Prior
Five
Year History:
|
2006
- Present, President, CEO and Director, Paradigm Holdings,
Inc.
|
|
1999
- 2006, Senior Vice President, ManTech International
Corporation
|
36
Richard
P. Sawchak, Senior Vice President and Chief Financial Officer - Mr. Sawchak has
served as Senior Vice President and Chief Financial Officer of the Company since
September 2005. From September 2003 to September 2005, he served as Director of
Global Financial Planning & Analysis at GXS, Inc., a managed services
company. At GXS, he was responsible for managing a global finance organization
focused on improving business performance. From August 2000 to August 2003, he
was the Director of Finance and Investor Relations at Multilink Technology
Corporation, a manufacturer of advanced-mixed-signal integrated circuits and
VLSI products. Mr. Sawchak has also held senior management positions at Lucent
Technologies, Inc. and graduated in the top of his class from Lucent’s financial
leadership program. He holds a Master’s Degree from Babson College and a
Bachelor’s Degree in Finance from Boston College, where he graduated summa cum
laude.
Mr.
Sawchak's Prior Five Year History:
|
2005
- Present, Senior Vice President and Chief Financial Officer, Paradigm
Holdings, Inc.
|
|
2003
- 2005, Director of Global Financial Planning and Analysis, GXS,
Inc.
|
Anthony
Verna, Senior Vice President of Strategy and Business Development – Mr. Verna
has served as a Senior Vice President of the Company since 2006. Mr. Verna
served as a Senior Vice President at US. ProTech Corporation from April 2005 to
November 2006 and as a Vice President at ManTech International Corporation from
December 2000 to April 2005. Mr. Verna has over 16 years of federal government
IT industry experience in both solutions sales and operations. A U.S. Navy
veteran, Mr. Verna has extensive experience with information technology programs
and enterprise systems, including comprehensive security solutions.
Mr.
Verna's Prior Five Year History:
|
2006
– Present, Senior Vice President, Paradigm Holdings,
Inc.
|
|
2005
– 2006, Senior Vice President, US. ProTech Corporation
|
||
2000
– 2005, Vice President, ManTech International
Corporation
|
Robert
Boakai, Vice President of Enterprise Solutions – Mr. Boakai has served as
Vice President of Enterprise Solutions of the Company since 2007. From August
2006 to March 2007, Mr. Boakai served as a Director of Information Technology at
Datatrac Information Services Inc., a logistics solutions company, where he
developed and implemented the strategic direction of Datatrac’s corporate IT
department. From March 2004 to July 2006, Mr. Boakai served as a Senior Systems
Engineer at Apptis, a federal systems integrator, where he implemented and
managed complex infrastructure solutions in support of ongoing technical
initiatives. From December 1999 to March 2004, Mr. Boakai served as a Vice
President at JenXSystems Inc. While at JenXsystems, he played a key role in
implementing and managing infrastructure and multimedia solutions in federal
space. Mr. Boakai holds a Bachelor's degree in Computer Science from the
University of Maryland and a Master's degree in Systems Engineering from Johns
Hopkins University.
Mr.
Boakai’s Prior Five Year History:
|
2007
– Present, Vice President, Paradigm Holdings, Inc.
|
|
2006
– 2007, Director, Computer Sciences Corporation
|
||
2004
– 2006, Senior Systems Engineer, Apptis
Inc.
|
Martin M.
Hale, Jr., Board Member – Martin M. Hale, Jr. has served as a director since
April 13, 2009. From July 2007 to the present, Mr. Hale has served as the
Chief Executive Officer and Portfolio Manager of Hale Capital Partners, L.P., a
private equity firm, and its affiliates. Prior to forming Hale Capital
Partners, L.P., Mr. Hale was a Managing Director of Pequot Ventures, which he
joined in 1997 as a founding team member. He served as a member of the
Investment and Operating Committees of Pequot Ventures from 2002 to
2007. Prior to joining Pequot Ventures, Mr. Hale was an associate with
Geocapital Partners, an early stage venture capital firm. Prior to
Geocapital Partners, Mr. Hale was an analyst in information technology M&A
at Broadview International. Mr. Hale earned a B.A. from Yale University,
cum laude with distinction, in 1994. Selected prior board memberships have
included: Analex, Inc., a publicly-traded federal IT services company that sold
to QinetiQ Group PLC; Flarion Technologies, which was sold to Qualcomm; Celiant
Corporation which was sold to Andrew Corporation; and Aurora Flight
Sciences.
Mr.
Hale’s Prior Five Year History:
|
2007
– Present, Chief Executive Officer and Portfolio Manager of Hale Capital
Partners, L.P.
|
|
1997
– 2007, founding team member, member of Investment and Operating Committee
and Managing Director, Pequot
Ventures
|
37
John A.
Moore, Board Member – Mr. Moore has served as a director of the Company since
April 2005. Mr. Moore has more than 30 years experience in private and public
company management for information technology firms. He is the former Executive
Vice President and CFO of ManTech International and was directly involved in
taking ManTech public in 2002 as well as facilitating a secondary offering. Mr.
Moore has extensive experience in strategic planning, corporate compliance,
proposal preparation and pricing and SEC reporting. He has a deep knowledge of
federal government contracting and financial management. Mr. Moore currently
serves or has served as a board member for Horne International, Inc., MOJO
Financial Services Inc. and Global Secured Corporation. Mr. Moore is also a
former member of the Board of Visitors for the University of Maryland’s Smith
School of Business. Mr. Moore has an MBA degree from the University of Maryland
and a B.S. degree in accounting from LaSalle University.
Mr.
Moore's Prior Five Year History:
|
2006
– Present, Chairman of the Board, MOJO Financial Services,
Inc.
|
|
2005
– 2007, Board Member, Global Secure Corporation
|
||
2003
- 2004, Executive Vice President, ManTech
International Corporation
|
NOMINATION
CRITERIA
Members
of our board of directors were nominated to serve as directors based on reasons
that included, among others, their experience with the Company and its industry,
business and finance experience and the Company’s contractual
obligations.
FAMILY
RELATIONSHIPS
There is
no family relationship between any of our officers or directors.
CODE OF
ETHICS
We
adopted a Code of Ethics applicable to our entire executive team, including our
principal executive officer, principal financial officer and principal
accounting officer, which is a “code of ethics” as defined by applicable rules
of the SEC. Our Code of Ethics was filed as an exhibit to a Registration
Statement on Form SB-2 dated February 11, 2005. Our Code of Ethics can be found
on our website at www.paradigmsolutions.com.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Exchange Act of 1934 requires our executive officers and directors,
and persons who beneficially own more than ten percent of our equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. Based on information provided to the Company, we
believe that all of the Company’s directors, executive officers and persons who
own more than ten percent of our common stock were in compliance with Section
16(a) of the Exchange act of 1934 during the last fiscal year except (1) Richard
Sawchak, John A. Moore and Peter B. LaMontagne, each filed a late
Form 4 with respect to their exchange of shares of Series A Preferred Stock for
shares of common stock, (2) Francis X. Ryan filed a late Form 4 with respect to
the redemption of shares of Series A Preferred Stock held by Mr. Ryan by the
Company, (3) Anthony Verna and Robert Bokai filed late Form 3’s with respect to
their status as executive officers of the Company and (4) Martin Hale filed a
late Form 3 with respect to his appointment to the Company’s Board of
Directors.
38
AUDIT
COMMITTEE
Our Board
of Directors has determined that Mr. Moore is an “audit committee financial
expert” as defined by Item 407 of Regulation S-K of the Securities Act of 1933,
as amended. Mr. Moore does not meet the criteria for audit committee
independence specified in the Marketplace Rules of the Nasdaq Stock Market and
the Exchange Act.
ITEM 11.
EXECUTIVE COMPENSATION
The
following table shows all the cash and non-cash compensation earned by the
Company’s named executive officers during the fiscal years ended December 31,
2009 and 2008. No restricted stock awards, long-term incentive plan payouts or
other types of compensation, other than the compensation identified in the table
below, were paid to these named executive officers during fiscal year 2009 or
fiscal year 2008. The Company did not grant any “Stock Awards” or “Option Award”
during fiscal year 2009.
SUMMARY
COMPENSATION TABLE
Name and Principal
Position
|
Year
|
Salary
($) (8)
|
Bonus
($) (8)
|
Stock
Awards (5)
($)
|
Option
Awards
(5), (6)
($)
|
All Other
Compensation
(7), (8)
($)
|
Total
($)
|
|||||||||||||||||||
Peter
LaMontagne (1)
|
2009
|
$ | 327,000 | $ | 42,500 | — | — | $ | 12,255 | $ | 381,755 | |||||||||||||||
President
and Chief Executive Officer
|
2008
|
$ | 324,000 | — | $ | 130,000 | $ | 23,693 | $ | 14,535 | $ | 492,228 | ||||||||||||||
Richard
Sawchak (2)
|
2009
|
$ | 250,016 | $ | 32,500 | — | — | $ | 10,875 | $ | 293,391 | |||||||||||||||
Senior
Vice President and Chief Financial Officer
|
2008
|
$ | 250,016 | — | $ | 35,000 | $ | 7,486 | $ | 10,275 | $ | 302,777 | ||||||||||||||
Anthony
Verna (3)
|
2009
|
$ | 250,016 | $ | 24,000 | — | $ | 12,535 | $ | 286,551 | ||||||||||||||||
Senior
Vice President, Strategy and Business Development
|
2008
|
$ | 250,016 | $ | 7,500 | $ | 40,000 | $ | 2,695 | $ | 11,695 | $ | 311,906 | |||||||||||||
Robert
Boakai (4)
|
2009
|
$ | 183,919 | $ | 24,000 | — | — | $ | 7,213 | $ | 215,132 | |||||||||||||||
Vice
President, Enterprise Solution
|
2008
|
$ | 179,669 | — | $ | 30,000 | $ | 1,995 | $ | 9,666 | $ | 221,330 |
(1)
|
Mr.
LaMontagne was hired on May 15, 2006. His annual salary approved by the
Compensation Committee of the Board of Directors (“Compensation
Committee”) was $315,000 with an opportunity to earn an annual achievement
bonus of $120,000 a year to be evaluated and paid annually. In addition,
the Compensation Committee granted options to acquire 500,000 shares of
common stock to Mr. LaMontagne with an exercise price of $2.50 per share
subject to a three-year vesting period during fiscal year 2006. On October
21, 2008, the Compensation Committee approved a modification to reduce the
exercise price of aforementioned options to $0.30 per share. On May 3,
2007 and October 21, 2008, the Compensation Committee granted 600,000
shares and 650,000 shares of restricted common stock, respectively, to Mr.
LaMontagne. The restricted shares will vest on January 2, 2012 and January
2, 2013, respectively, and have no interim
vesting.
|
(2)
|
Mr.
Sawchak was hired on September 19, 2005. His annual salary was $200,000
with an opportunity to earn an annual bonus of $50,000. The Compensation
Committee granted options to acquire 200,000 shares of common stock to Mr.
Sawchak with an exercise price of $1.70 per share which vested immediately
during fiscal year 2005. On October 21, 2008, the Compensation Committee
approved a modification to reduce the exercise price of aforementioned
options to $0.30 per share. On May 3, 2007 and October 21, 2008, the
Compensation Committee granted 400,000 shares and 175,000 shares of
restricted common stock, respectively, to Mr. Sawchak. The restricted
shares will vest on January 2, 2012 and January 2, 2013, respectively, and
have no interim vesting.
|
39
(3)
|
Mr.
Verna was hired on December 18, 2006. His annual salary is $250,000 with
an opportunity to earn incentive/bonus pay based on negotiated metrics. In
addition, the Compensation Committee granted options to acquire 150,000
shares of common stock to Mr. Verna during fiscal year 2006 with an
exercise price of $0.75 per share subject to a three-year vesting period.
On October 21, 2008, the Compensation Committee approved a modification to
reduce the exercise price of aforementioned options to $0.30 per share. On
May 3, 2007 and October 21, 2008, the Compensation Committee granted
100,000 shares and 200,000 shares of restricted common stock,
respectively, to Mr. Verna. The restricted shares will vest on January 2,
2012 and January 2, 2013, respectively, and have no interim
vesting.
|
(4)
|
Mr.
Boakai was hired on March 28, 2007. His annual salary is $150,000 and he
is eligible for executive bonuses in the form of cash or stock options
based on performance under the Management Incentive Plan. In addition, the
Compensation Committee granted options in two equal installments to
acquire 100,000 shares of common stock to Mr. Boakai during fiscal year
2007 with exercise prices of $0.80 and $0.84 per share, respectively,
subject to a three-year vesting period. On October 21, 2008, the
Compensation Committee approved a modification to reduce the exercise
price of the aforementioned options to $0.30 per share. On October 21,
2008, the Compensation Committee granted 150,000 shares of restricted
common stock to Mr. Boakai. The restricted shares will vest on January 2,
2013 and have no interim vesting.
|
(5)
|
The
SEC’s disclosure rules previously required that the Company present stock
award and option award information for 2008 based on the amount recognized
during the corresponding year for financial statement reporting purposes
with respect to these awards (which meant, in effect, that in any given
year the Company could recognize for financial statement reporting
purposes amounts with respect to grants made in that year as well as with
respect to grants from past years that vested in or were still vesting
during that year). However, the recent changes in the SEC’s disclosure
rules require that the Company now present the stock award and option
award amounts in the applicable columns of the table above with respect to
fiscal year 2008 on a similar basis as the fiscal 2009 presentation using
the grant date fair value of the awards granted during the corresponding
year (regardless of the period over which the awards are scheduled to
vest). Since this requirement differs from the SEC’s past disclosure
rules, the amounts reported in the table above for stock award and option
awards in fiscal year 2008 differs from the amounts previously reported in
the Company’s Summary Compensation Table for the year. As a result, each
named executive officer’s total compensation amounts for fiscal year 2008
also differs from the amounts previously reported in the Company’s Summary
Compensation Table for the year. These values have been determined under
generally accepted accounting principles used to calculate the value of
equity awards for purposes of the Company’s consolidated financial
statements. For a discussion of the assumptions and methodologies used to
calculate the amounts reported above, please refer to Notes 1 and 14 of
the Notes to Consolidated Financial Statements for a further discussion of
the Company’s share-based awards.
|
(6)
|
The
amount reported is the incremental fair value of the aforementioned
repricing on October 21, 2008.
|
(7)
|
See
All Other Compensation chart below for amounts, which include perquisites
and the Company matches on employee contributions to the Company’s 401(k)
plan.
|
Name
|
Year
|
Automobile
Allowance
|
Life Insurance
Premiums
|
Company
401(k) Match
|
Total
|
|||||||||||||
Peter
LaMontagne
|
2009
|
— | $ | 2,455 | $ | 9,800 | $ | 12,255 | ||||||||||
2008
|
$ | 3,000 | $ | 2,315 | $ | 9,220 | $ | 14,535 | ||||||||||
Richard
Sawchak
|
2009
|
— | $ | 1,075 | $ | 9,800 | $ | 10,875 | ||||||||||
2008
|
— | $ | 1,075 | $ | 9,200 | $ | 10,275 | |||||||||||
Anthony
Verna
|
2009
|
— | $ | 2,735 | $ | 9,800 | $ | 12,535 | ||||||||||
2008
|
— | $ | 2,495 | $ | 9,200 | $ | 11,695 | |||||||||||
Robert
Boakai
|
2009
|
— | $ | 3,245 | $ | 3,968 | $ | 7,213 | ||||||||||
2008
|
— | $ | 3,185 | $ | 6,481 | $ | 9,666 |
(8)
|
The
amount in the “Salary”, “Bonus” and “All Other Compensation” columns of
the Summary Compensation Table above is reported on an accrual
basis.
|
40
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table presents information regarding the outstanding equity awards
held by each of the officers named in the Summary Compensation Table as of
December 31, 2009.
Option
Awards
|
Stock
Awards
|
||||||||||||||||||||
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
(2)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
of
Units
of
Stock
That
Have
Not
Vested
($)
(3)
|
|||||||||||||||
Peter
LaMontagne (4)
|
500,000 | — | $ | 0.30 |
5/15/2016
|
1,250,000 | $ | 62,500 | |||||||||||||
Richard
Sawchak (1), (4)
|
200,000 | — | $ | 0.30 |
12/14/2015
|
575,000 | $ | 28,750 | |||||||||||||
Anthony
Verna (4)
|
150,000 | — | $ | 0.30 |
12/18/2016
|
300,000 | $ | 15,000 | |||||||||||||
Robert
Boakai (4)
|
33,334 | 16,666 | $ | 0.30 |
5/2/2017
|
150,000 | $ | 7,500 | |||||||||||||
33,334 | 16,666 | $ | 0.30 |
8/1/2017
|
(1)
|
These
options were granted on December 15, 2005 and vested
immediately.
|
(2)
|
The
Company modified the exercise price of the options granted prior to
December 31, 2007 to $0.30 from the original exercise prices with other
terms and condition remained unchanged on October 21,
2008.
|
(3)
|
Based
on the closing market price of $0.05 at December 31,
2009.
|
(4)
|
The
vesting dates for the option and stock awards granted are as
below:
|
Name
|
Option
Awards
|
Stock
Awards
|
||
Peter
LaMontagne
|
5/15/2009
|
1/2/2012;
1/2/2013
|
||
Richard
Sawchak
|
12/15/2005
|
1/2/2012;
1/2/2013
|
||
Anthony
Verna
|
12/18/2009
|
1/2/2012;
1/2/2013
|
||
Robert
Boakai
|
5/3/2010;
8/2/2010
|
1/2/2013
|
EMPLOYMENT
ARRANGMENTS
Peter
LaMontagne’s offer letter dated April 28, 2006 provides that if he is terminated
from the Company for any reason other than “cause,” including a change in
ownership control, he will be entitled to six months of severance pay at
his then current salary.
Richard
Sawchak’s offer letter dated June 28, 2007 provides that if he is terminated
from the Company for any reason other than “cause,” including a change in
ownership control, he will be entitled to six months of severance pay at his
current salary along with full benefits.
Anthony
Verna’s offer letter dated October 27, 2006 provides that if he is terminated
from the Company for any reason other than “cause,” including a change in
ownership control, he will be entitled to six months of severance pay at his
then current salary.
Robert
Bokai’s offer letter dated March 12, 2007 provides that if he is terminated from
the Company for any reason other than “cause,” including a change in ownership
control, he will be entitled to three months of severance pay at his then
current salary.
COMPENSATION
OF DIRECTORS
The
following table shows all the fees earned or cash paid by the Company during the
fiscal year ended December 31, 2009 to the Company’s non-employee directors. No
option and restricted stock awards, long-term incentive plan payouts or other
types of payments, other than the amount identified in the chart below, were
paid to these directors during the fiscal year ended December 31,
2009.
41
DIRECTOR
COMPENSATION
Name
|
Fees
Earned or Paid
in
Cash
($)
|
Option
Awards
($)
|
Stock
Awards
($)
|
Total
($)
|
||||||||||||
Raymond
Huger (1)
|
$ | 62,000 | — | — | $ | 62,000 | ||||||||||
Francis
X. Ryan (2, 6)
|
$ | 12,156 | — | — | $ | 12,156 | ||||||||||
John
A. Moore (3)
|
$ | 39,052 | — | — | $ | 39,052 | ||||||||||
Edwin
Mac Avery (4, 6)
|
$ | 10,747 | — | — | $ | 10,747 | ||||||||||
Martin
M. Hale, Jr. (5)
|
— | — | — | — |
(1)
|
Mr.
Huger did not have any option and stock awards outstanding at fiscal year
end.
|
(2)
|
Mr.
Ryan had options to acquire 40,000 shares of common stock outstanding at
fiscal year end.
|
(3)
|
Mr.
Moore had options to acquire 40,000 shares of common stock and 150,000
shares of restricted common stock outstanding at fiscal year
end.
|
(4)
|
Mr.
Avery had options to acquire 40,000 shares of common stock outstanding at
fiscal year end.
|
(5)
|
Mr.
Hale did not have any option and stock awards outstanding at fiscal year
end.
|
(6)
|
Mr.
Ryan resigned from the Board effective April 1, 2009 and Mr. Avery
resigned from the Board effective March 31,
2009.
|
For the
fiscal year ended December 31, 2009, non-employee directors, with exception of
Mr. Hale, received an annual fee of $87,500 that is paid quarterly, a fee of
$1,500 per meeting and received reimbursement for out-of-pocket expenses
incurred for attendance at meetings of the Board of Directors. Board members who
are members of the audit and compensation committee received $1,000 and $1,500,
respectively, and receive reimbursement for out-of-pocket expenses incurred for
attendance at meetings of the Committees of the Board of Directors. Mr. Hale
does not receive any fees for his services as a director.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information about the beneficial ownership of our
common stock as of March 18, 2010 by (i) each person who we know is the
beneficial owner of more than 5% of the outstanding shares of our common stock
(ii) each of our directors, (iii) each of the officers named
in the Summary Compensation Table and (iv) all of our directors and
executive officers as a group.
Title
of Class
|
Name
and Address of
Beneficial
Owner (1)
|
Amount
and
Nature
of
Beneficial
Ownership
|
Percentage
of
Common
Stock
(2)
|
||||||
Common
Stock
|
FTC
Emerging Markets Inc.
126
East 56th
Street – Suite 3110 New York, New York 10022
|
14,574,883 | (3) | 33.22 | % | ||||
Common
Stock
|
Harry
Kaneshiro
|
3,450,000 | (4) | 7.85 | % | ||||
Common
Stock
|
Peter
LaMontagne
|
3,040,352 | (5) | 6.85 | % | ||||
Common
Stock
|
Richard
Sawchak
|
2,065,352 | (6) | 4.69 | % | ||||
Common
Stock
|
Anthony
Verna
|
450,000 | (7) | 1.01 | % | ||||
Common
Stock
|
Robert
Boakai
|
233,334 | (8) | * | |||||
Common
Stock
|
Raymond
Huger
|
9,894,719 | 22.56 | % | |||||
Common
Stock
|
John
A. Moore
|
7,341,757 | (9) | 16.72 | % | ||||
Common
Stock
|
Martin
M. Hale, Jr.
|
2,700,888 | (10) | 5.80 | % | ||||
All
Directors and Executive Officers as a Group (8 persons)
|
25,959,735 | 54.00 | % |
* Less
than one percent of the outstanding common stock
42
(1)
|
Unless
otherwise indicated, the address of each person listed above is the
address of the Company, 9715 Key West Avenue, Third Floor, Rockville,
Maryland, 20850.
|
(2)
|
Applicable
percentage of ownership is based on 43,868,027 shares of common stock
outstanding as of March 18, 2010 together with securities exercisable
or convertible into shares of common stock within 60 days of
March 18, 2010 for each shareholder. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of
common stock that are currently exercisable or exercisable within 60 days
of March 18, 2010 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other
person.
|
(3)
|
Based
solely on information contained in the Form 4 filed by FTC Emerging
Markets Inc. on March 3, 2009. Includes 5,000 shares held by FTC Capital
Markets, Inc. an affiliated company of FTC Emerging Markets, Inc. On May
19, 2009, the SEC filed a civil injunctive action charging Guillermo David
Clamens, FTC Capital Markets, Inc., FTC Emerging Markets, also d/b/a FTC
Group , and Lina Lopez, an FTC employee, with various matters. A copy of
the complaint is available at
http://www.sec.gov/litigation/complaints/2009/comp21052.pdf.
|
(4)
|
Includes
an option exercisable to purchase 100,000 shares of common stock within 60
days of March 18, 2010.
|
(5)
|
Includes
(i) 1,250,000 shares of restricted common stock subject to vesting, (ii) a
warrant exercisable to purchase 8,300 shares of common stock within 60
days of March 18, 2010, and (iii) an option exercisable to purchase
500,000 shares of common stock within 60 days of March 18,
2010.
|
(6)
|
Includes
(i) 575,000 shares of restricted common stock subject to vesting, (ii) a
warrant exercisable to purchase 8,300 shares of common stock within 60
days of March 18, 2010, and (iii) an option exercisable to purchase
200,000 shares of common stock within 60 days of March 18,
2010.
|
(7)
|
Includes
(i) 300,000 shares of restricted common stock subject to vesting and (ii)
an option exercisable to purchase 150,000 shares of common stock within 60
days of March 18, 2010.
|
(8)
|
Includes
(i) 150,000 shares of restricted common stock subject to vesting and (ii)
an option exercisable to purchase 83,334 shares of common stock within 60
days of March 18, 2010.
|
(9)
|
Includes
(i) 150,000 shares of restricted common stock subject to vesting, (ii) a
warrant exercisable to purchase 41,500 shares of common stock within 60
days of March 18, 2010, (iii) an option exercisable to purchase
40,000 shares of common stock within 60 days of March 18, 2010 and
(iv) 6,410,257 shares that Mr. Moore holds as a joint tenant with his
spouse.
|
(10)
|
Includes
2,700,888 shares issuable upon exercise of Warrants held by the Purchasers
that are exercisable prior to the consummation of the contemplated
Reincorporation (as described below under “Changes in Control”).
Immediately following the consummation of the Reincorporation, such
Warrants will be exercisable for an aggregate of 148,664,852 shares of the
common stock of Paradigm Holdings, Inc., a Nevada corporation (“Paradigm
Nevada”). Mr. Hale is the Chief Executive Officer of each of Hale Capital
and Hale Fund Management, LLC, the managing member of EREF PARA LLC.
Mr. Hale disclaims beneficial ownership of these securities except to the
extent of his pecuniary interest
therein.
|
43
CHANGES
IN CONTROL
The
Certificate of Designations provides that the Board of Directors shall consist
of no more than seven directors and after the receipt of the shareholder
approval specified in the Purchase Agreement (the “Amendment Date”), the Board
of Directors shall consist of five directors (except upon the occurrence of an
event of default as described below). For so long as the Ownership
Threshold is met, a majority of the then outstanding shares of Series A-1
Preferred Stock (the “Majority Holders”) will have the right (subject to the
terms of a side letter) to elect two directors to the Board of Directors and,
until the Amendment Date, two observers to the Board of Directors, provided that
after the Amendment Date, such shareholders may only elect one observer to the
Board of Directors. Subject to certain limitations, the Majority Holders
may elect to convert the board observers into directors. If the Ownership
Threshold is not met, then the Majority Holders would have the right (subject to
the side letter) to elect one director to the Board of Directors and one
observer to the Board of Directors. On February 27, 2009, the Purchasers entered
into a side letter, which was accepted and agreed to by the Company, that grants
Hale Capital the authority to designate the directors and Board observers to be
elected by the Majority Holders of the Series A-1 Preferred Stock pursuant to
the Certificate of Designations.
In
addition, upon the occurrence of an event of default under the Certificate of
Designations, the number of directors constituting the Company’s Board of
Directors will automatically increase by a number equal to the number of
directors then constituting the Board of Directors plus one and the holders of
the Series A-1 Preferred Stock are entitled to elect such additional
directors. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
Resources.”
Each
share of Series A-1 Preferred Stock entitles the holder to such number of votes
as shall equal the number of shares of common stock issuable upon exercise of
the Class A Warrants held by such holder as of the applicable record date.
As of March 18, 2010, the Purchasers beneficially owned an aggregate of
5.8% of the voting securities of the Company (based on a determination of
beneficial ownership pursuant to Rule 13d-3 of the Exchange Act). The
Company intends to seek shareholder approval of a Plan and Agreement of Merger
to reincorporate the Company into the
State of Nevada (the “Reincorporation”). It is contemplated that Paradigm Nevada
will have 250 million authorized shares of common stock. Following the
Reincorporation, we anticipate that the holders of our Series A-1
Senior Preferred Stock will hold a super majority of the outstanding voting
equity of Paradigm Nevada, because the Warrants will be exercisable for an
aggregate of 148,664,852 shares of the common stock of Paradigm
Nevada.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PREFERRED
STOCK EXCHANGE AGREEMENT
On
February 27, 2009, pursuant to a Preferred Stock Exchange Agreement dated as of
the same date (the “Exchange Agreement”) among the Company and Peter LaMontagne,
Richard Sawchak, John A. Moore and Annedenise Moore and FTC Emerging Markets
(the “Former Series A Holders”), each of the Former Series A Holders exchanged
all shares of Series A Preferred Stock held by such holders for an aggregate of
21,794,874 shares of the Company’s common stock. The Exchange Agreement
provides that the Company is to offer each Former Series A Holder an opportunity
to purchase its pro rata share of certain securities that may be sold by the
Company in the future. In addition, the Exchange Agreement provides for the
issuance of additional shares of Common Stock to the Former Series A Holders
under certain circumstances. The Exchange Agreement also provides the
Former Series A Holders with piggy back registration rights with respect to the
shares of common stock issued pursuant to the Preferred Stock Exchange
Agreement. Peter LaMontagne is the President and CEO of the Company and a member
of the Company’s Board of Directors, Richard Sawchak is the Company’s Senior
Vice President and Chief Financial Officer, and John A. Moore is a member of the
Company’s Board of Directors. As of March 18, 2010, each of Peter B. LaMontagne,
John A. Moore and FTC Emerging Markets beneficially owned 6.85%, 16.72% and
33.22%, respectively, of the Company’s outstanding common stock.
On May
19, 2009, the SEC filed a civil injunctive action charging Guillermo David
Clamens, FTC Capital Markets, Inc., FTC Emerging Markets, also d/b/a FTC Group,
and Lina Lopez, an FTC employee, with various matters. A copy of the complaint
is available at
http://www.sec.gov/litigation/complaints/2009/comp21052.pdf.
44
PREFERRED
STOCK REDEMPTION AGREEMENT
On
February 27, 2009, pursuant to a Preferred Stock Redemption Agreement dated as
of the same date (the “Redemption Agreement”) among the Company, USA Asset
Acquisition Corp. and Semper Finance, Inc. (the “Additional Former Series A
Holders”), the Company redeemed all shares of Series A Preferred Stock held by
such Additional Former Series A Holders for an aggregate of approximately
$111,000. Francis X. Ryan, a member of the Company’s Board of Directors, is the
President of each of the Additional Former Series A Holders.
PRIVATE
PLACEMENT
On
February 27, 2009, the Company completed the sale, in a private placement
transaction, of 6,206 shares of Series A-1 Preferred Stock, Class A Warrants to
purchase up to an aggregate of approximately 79.6 million shares of common stock
with an exercise price equal to $0.0780 per share and Class B Warrants to
purchase up to an aggregate of approximately 69.1 million shares of common stock
at an exercise price of $0.0858 per share to Hale Capital and EREF PARA LLC.
Paradigm received gross proceeds of approximately $6.2 million from the private
placement. See the discussion of the private under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources”. Martin Hale, Jr. is the Chief Executive Officer of each of Hale
Capital and Hale Fund Management, LLC, the managing member of EREF PARA. Mr.
Hale became a director of the Company on April 13, 2009.
DIRECTOR
INDEPENDENCE
John A.
Moore, Martin Hale, Francis X.Ryan and Edwin Mac Avery are considered to be “
independent” as that term is defined by NASDAQ Listing Rule 5605. Mr. Ryan
resigned from the Board effective April 1, 2009 and Mr. Avery resigned from the
Board effective March 31, 2009. John A. Moore, Raymond Huger and Martin Hale are
each members of the Company’s Audit Committee and none of Messrs. Moore, Huger
or Martin meet the criteria for audit committee independence specified in NASDAQ
Listing Rule 5605 and the Exchange Act.
AUDIT AND
NON-AUDIT FEES
The
following table presents fees for professional services rendered by Grant
Thornton LLP (“GT”) for fiscal year ended December 31, 2009 and GT, BDO Seidman,
LLP (“BDO”) and Aronson & Company (“Aronson”) for fiscal year ended December
31, 2008.
YEARS ENDED DECEMBER 31,
|
||||||||
2009
|
2008 (1)
|
|||||||
Audit
fees
|
$ | 116,000 | $ | 323,700 | ||||
Audit
related fees (2)
|
$ | 7,056 | $ | 12,781 | ||||
Tax
fees
|
$ | — | $ | — | ||||
All
other fees
|
$ | — | $ | — | ||||
Total
|
$ | 123,056 | $ | 336,481 |
(1)
|
2008
amount includes Audit fees paid GT of $282,000, BDO of $24,000 and Aronson
of $17,700. 2008 amount also includes Audit related fees paid GT of
$12,100 and Aronson of $681.
|
(2)
|
Audit
related fees are out-of-pocket expenses incurred and such fees were all
pre-approved by the Audit
Committee.
|
POLICY ON
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
INDEPENDENT AUDITOR
Prior to
engagement of the independent auditor for the next year’s audit, management will
submit an aggregate of services expected to be rendered during that year for
each of four categories of services to the Audit Committee for approval.
Consistent with SEC policies regarding auditor independence, the Audit Committee
has responsibility for appointing, setting compensation and overseeing the work
of the independent auditor. In recognition of this responsibility, the Audit
Committee established a policy in 2005 to pre-approve all audit and permissible
non-audit services provided by the independent auditor. The Audit Committee will
approve of all permissible non-audit services consistent with SEC
requirements.
45
1.
|
Audit
services include audit work performed in the preparation of the Company’s
consolidated financial statements, as well as work that generally only the
independent auditor can reasonably be expected to provide, including
comfort letters, statutory audits, and attest services and consultation
regarding financial accounting and/or reporting
standards.
|
2.
|
Audit
related services are for assurance and related services that are
traditionally performed by the independent auditor, including due
diligence related to mergers and acquisitions, employee benefit plan
audits, and special procedures required to meet certain regulatory
requirements.
|
3.
|
Tax
services include all services performed by the independent auditor’s tax
personnel except those services specifically related to the audit of the
Company’s consolidated financial statements, and includes fees in the
areas of tax compliance, tax planning, and tax
advice.
|
4.
|
Other
fees are those associated with services not captured in the other
categories.
|
Prior to
future engagements, the Audit Committee will pre-approve these services by
category of service. During the year, circumstances may arise when it may become
necessary to engage the independent auditor for additional services not
contemplated in the original pre-approval. In those instances, the Audit
Committee requires specific pre-approval before engaging the independent
auditor. The Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting.
46
PART
IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits.
We have filed, or incorporated into this Annual Report on Form 10-K by
reference, the exhibits listed on the accompanying Exhibits Index immediately
following the signature page of this Annual Report on Form 10-K.
Financial
Statements.
FINANCIAL
STATEMENTS
PARADIGM
HOLDINGS, INC.
TABLE OF
CONTENTS
Page
|
||
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-1
|
|
AUDITED
FINANCIAL STATEMENTS
|
||
Consolidated Balance
Sheets as of December 31, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008.
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the
years ended December 31, 2009 and 2008
|
F-5
— F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
— F-29
|
47
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Paradigm
Holdings, Inc.
Rockville,
MD
We have
audited the accompanying consolidated balance sheets of Paradigm Holdings,
Inc. (a Wyoming corporation) and Subsidiaries ("the Company") as of
December 31, 2009 and 2008 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the years then ended. Our
audits of the basic financial statements included the financial statement
schedule listed in the index appearing under Item 15. The financial statements
and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Paradigm Holdings, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ Grant
Thornton LLP
Baltimore,
Maryland
March 30,
2010
F-1
PARADIGM
HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 895,711 | $ | 52,257 | ||||
Accounts
receivable — contracts, net
|
5,519,150 | 6,920,768 | ||||||
Prepaid
expenses
|
873,934 | 1,033,837 | ||||||
Prepaid
corporate income taxes
|
— | 47,092 | ||||||
Deferred
income tax assets
|
24,114 | 60,269 | ||||||
Other
current assets
|
473,670 | 554,610 | ||||||
Total
current assets
|
7,786,579 | 8,668,833 | ||||||
Property
and equipment, net
|
127,093 | 183,612 | ||||||
Goodwill
|
3,991,605 | 3,991,605 | ||||||
Intangible
assets, net
|
897,318 | 1,244,591 | ||||||
Deferred
financing costs, net
|
848,294 | — | ||||||
Deferred
income tax assets, net of current portion
|
512,820 | 211,326 | ||||||
Other
non-current assets
|
582,394 | 172,029 | ||||||
Total
Assets
|
$ | 14,746,103 | $ | 14,471,996 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Note
payable — line of credit
|
$ | 3,643,653 | $ | 5,949,983 | ||||
Note
payable — promissory note
|
— | 2,000,000 | ||||||
Capital
leases payable, current portion
|
— | 1,578 | ||||||
Accounts
payable and accrued expenses
|
2,333,085 | 3,498,690 | ||||||
Accrued
salaries and related liabilities
|
1,527,561 | 1,474,133 | ||||||
Corporate
income tax payable
|
98,686 | — | ||||||
Mandatorily
redeemable preferred stock, current portion
|
500,000 | — | ||||||
Other
current liabilities
|
178,333 | 227,200 | ||||||
Total
current liabilities
|
8,281,318 | 13,151,584 | ||||||
Long-term
liabilities
|
||||||||
Other
non-current liabilities
|
126,348 | 183,870 | ||||||
Mandatorily
redeemable preferred stock - $.01 par value, 10,000,000 shares authorized,
6,206 shares issued and outstanding as of December 31,
2009
|
4,587,135 | — | ||||||
Put
warrants
|
1,447,075 | — | ||||||
Total
liabilities
|
14,441,876 | 13,335,454 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity
|
||||||||
Convertible
preferred stock - $.01 par value, 10,000,000 shares authorized, 0 and
1,800 shares issued and outstanding as of December 31, 2009 and 2008,
respectively. Each share of convertible preferred stock has a liquidation
preference of $0.01 per share plus all accrued but unpaid
dividends
|
— | 18 | ||||||
Common
stock - $.01 par value, 50,000,000 shares authorized, 41,243,027
shares and 19,148,153 shares issued and outstanding as of
December 31, 2009 and 2008, respectively
|
412,431 | 191,482 | ||||||
Additional
paid-in capital
|
3,434,891 | 3,215,400 | ||||||
Accumulated
deficit
|
(3,543,095 | ) | (2,270,358 | ) | ||||
Total
stockholders’ equity
|
304,227 | 1,136,542 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 14,746,103 | $ | 14,471,996 |
The
accompanying Notes to the Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-2
PARADIGM
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31,
|
2009
|
2008
|
||||||
Contract
Revenue
|
||||||||
Service
contracts
|
$ | 23,273,245 | $ | 27,686,076 | ||||
Repair
and maintenance contracts
|
8,902,889 | 11,454,523 | ||||||
Total
contract revenue
|
32,176,134 | 39,140,599 | ||||||
Cost
of revenue
|
||||||||
Service
contracts
|
17,817,262 | 21,144,744 | ||||||
Repair
and maintenance contracts
|
7,203,458 | 9,950,612 | ||||||
Total
cost of revenue
|
25,020,720 | 31,095,356 | ||||||
Gross
margin
|
7,155,414 | 8,045,243 | ||||||
Selling,
general and administrative
|
7,058,724 | 8,125,585 | ||||||
Income
(loss) from operations
|
96,690 | (80,342 | ) | |||||
Other
income (expense)
|
||||||||
Interest
income
|
15 | 2,793 | ||||||
Change
in fair value of put warrants
|
481,092 | — | ||||||
Interest
expense – mandatorily redeemable preferred stock
|
(1,387,008 | ) | — | |||||
Interest
expense
|
(548,653 | ) | (1,044,892 | ) | ||||
Other
income
|
— | 3,227 | ||||||
Total
other expense
|
(1,454,554 | ) | (1,038,872 | ) | ||||
Loss
from operations before income taxes
|
(1,357,864 | ) | (1,119,214 | ) | ||||
Benefit
for income taxes
|
(85,127 | ) | (342,139 | ) | ||||
Net
loss
|
(1,272,737 | ) | (777,075 | ) | ||||
Dividends
on preferred stock
|
78,870 | 180,000 | ||||||
Net
loss attributable to common shareholders
|
$ | (1,351,607 | ) | $ | (957,075 | ) | ||
Weighted
average number of common shares:
|
||||||||
Basic
|
37,535,548 | 19,148,153 | ||||||
Diluted
|
37,535,548 | 19,148,153 | ||||||
Basic
net loss per common share
|
$ | (0.04 | ) | $ | (0.05 | ) | ||
Diluted
net loss per common share
|
$ | (0.04 | ) | $ | (0.05 | ) |
The
accompanying Notes to the Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-3
PARADIGM
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
|
Convertible
Preferred Stock
|
Additional
Paid-in |
Accumulated
|
|||||||||||||||||||||||||
Share
|
Amount
|
Share
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
January 1, 2008
|
19,148,153 | $ | 191,482 | 1,800 | $ | 18 | $ | 2,773,547 | $ | (1,493,283 | ) | $ | 1,471,764 | |||||||||||||||
Dividend
declared
|
— | — | — | — | (180,000 | ) | — | (180,000 | ) | |||||||||||||||||||
Direct
issuance cost
|
(25 | ) | (25 | ) | ||||||||||||||||||||||||
Share-based
compensation
|
— | — | — | — | 621,878 | — | 621,878 | |||||||||||||||||||||
Net
loss
|
— | — | — | — | — | (777,075 | ) | (777,075 | ) | |||||||||||||||||||
Balance,
December 31, 2008
|
19,148,153 | $ | 191,482 | 1,800 | $ | 18 | $ | 3,215,400 | $ | (2,270,358 | ) | $ | 1,136,542 | |||||||||||||||
Exchange
and redemption of Series A Preferred Stock
|
21,794,874 | 217,949 | (1,800 | ) | (18 | ) | (324,931 | ) | (107,000 | ) | ||||||||||||||||||
Vesting
of restricted common stock
|
300,000 | 3,000 | (3,000 | ) | — | |||||||||||||||||||||||
Dividend
declared
|
— | — | — | — | (30,000 | ) | — | (30,000 | ) | |||||||||||||||||||
Share-based
compensation
|
— | — | — | — | 577,422 | — | 577,422 | |||||||||||||||||||||
Net
loss
|
— | — | — | — | — | (1,272,737 | ) | (1,272,737 | ) | |||||||||||||||||||
Balance,
December 31, 2009
|
41,243,027 | $ | 412,431 | — | $ | — | $ | 3,434,891 | $ | (3,543,095 | ) | $ | 304,227 |
The
accompanying Notes to the Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-4
PARADIGM
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended December 31,
|
2009
|
2008
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (1,272,737 | ) | $ | (777,075 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Share-based
compensation
|
577,422 | 621,878 | ||||||
Depreciation
and amortization
|
435,107 | 588,455 | ||||||
Bad
debt recovery
|
(4,316 | ) | (25,082 | ) | ||||
Amortization
of deferred financing costs
|
326,784 | — | ||||||
Interest
expense for accretion of warrant discount
|
379,314 | — | ||||||
Accretion
of preferred stock
|
408,546 | — | ||||||
Change
in fair value of put warrants
|
(481,092 | ) | — | |||||
Loss
on disposal of property and equipment
|
22,841 | 18,280 | ||||||
Deferred
income taxes
|
(265,339 | ) | (423,830 | ) | ||||
(Increase)
Decrease in
|
||||||||
Accounts
receivable —
contracts, net
|
1,405,934 | 2,086,952 | ||||||
Prepaid
expenses
|
154,903 | 49,692 | ||||||
Prepaid
corporate income taxes
|
47,092 | 27,115 | ||||||
Other
current assets
|
80,940 | (207,825 | ) | |||||
Other
non-current assets
|
(445,365 | ) | 21,189 | |||||
(Decrease)
Increase in
|
||||||||
Accounts
payable and accrued expenses
|
(1,130,710 | ) | (464,219 | ) | ||||
Accrued
salaries and related liabilities
|
53,428 | (76,829 | ) | |||||
Income
taxes payable
|
98,686 | — | ||||||
Other
current liabilities
|
(48,867 | ) | 49,356 | |||||
Other
non-current liabilities
|
(57,522 | ) | (87,520 | ) | ||||
Net
cash provided by operating activities
|
285,049 | 1,400,537 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Cash
paid for business acquisitions, net of cash assumed
|
— | (80,116 | ) | |||||
Cash
proceeds from sale of property and equipment
|
— | 1,600 | ||||||
Purchase
of property and equipment
|
(44,050 | ) | (37,354 | ) | ||||
Net
cash used in investing activities
|
(44,050 | ) | (115,870 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Bank
overdraft
|
— | (1,687,491 | ) | |||||
Payments
on capital leases
|
(1,578 | ) | (30,772 | ) | ||||
Payments
on notes payable
|
(2,000,000 | ) | (18,203 | ) | ||||
Proceeds
from mandatorily redeemable preferred stock
|
6,206,000 | — | ||||||
Preferred
stock issuance costs
|
(1,113,637 | ) | (5,000 | ) | ||||
Dividends
paid on preferred stock
|
(75,000 | ) | (180,000 | ) | ||||
Repurchase
of Series A Preferred Stock
|
(107,000 | ) | — | |||||
Proceeds
from line of credit
|
44,698,000 | 60,414,216 | ||||||
Payments
on line of credit
|
(47,004,330 | ) | (59,732,931 | ) | ||||
Net
cash provided by (used in) financing activities
|
602,455 | (1,240,181 | ) | |||||
Net
increase in cash and cash equivalents
|
843,454 | 44,486 | ||||||
Cash
and equivalents, beginning of period
|
52,257 | 7,771 | ||||||
Cash
and cash equivalents, end of period
|
$ | 895,711 | $ | 52,257 |
F-5
Years Ended December 31,
|
2009
|
2008
|
||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid
|
||||||||
Cash
paid for income taxes
|
$ | 51,771 | $ | 58,139 | ||||
Cash
paid for interest
|
$ | 923,4403 | $ | 987,163 | ||||
Non-cash
financing activities:
|
||||||||
Conversion
of Series A preferred stock to common stock
|
$ | 1,191,771 | $ | — | ||||
Dividends
declared but not paid
|
$ | — | $ | 45,000 |
The
accompanying Notes to the Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-6
PARADIGM
HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Paradigm
Holdings, Inc. (“Paradigm Holdings”), formerly known as Cheyenne Resources,
Inc., was incorporated in Wyoming on November 17, 1970. On November 3, 2004,
Paradigm Holdings acquired Paradigm Solutions Corporation (“PSC”) through a
reverse acquisition (the “Reverse Acquisition”). Paradigm Holdings acquired
Trinity IMS, Inc. (“Trinity”), on April 9, 2007 to deliver IT solutions into the
national security marketplace and Caldwell Technology Solutions, LLC (“CTS”) on
July 2, 2007 to provide advanced information technology solutions in support of
National Security programs within the Intelligence Community. Collectively the
entities we refer to as “PDHO” or “the Company” herein.
Headquartered
in Rockville, Maryland, the Company provides information technology, information
assurance, and business continuity solutions, primarily to U.S. federal
government customers.
The
Company’s operations are subject to certain risks and uncertainties including,
among others, dependence on contracts with federal government agencies,
dependence on significant clients, existence of contracts with fixed pricing,
dependence on subcontractors to fulfill contractual obligations, current and
potential competitors with greater resources, a dependence on key management
personnel, our ability to recruit and retain qualified employees, and
uncertainty of future profitability and possible fluctuations in financial
results.
Principles
of Consolidation
The
accompanying Consolidated Financial Statements include the accounts of Paradigm
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
Liquidity
As of
December 31, 2009, the Company had an accumulated deficit of approximately $3.5
million and working capital deficit of $0.5 million. Additionally, the Company
is highly dependent on a line-of-credit financing arrangement. Although there
can be no assurances, the Company believes that cash flow from operations,
together with borrowings available from our credit facility with Silicon Valley
Bank (“SVB”) and the combination of in-process cost reductions will be adequate
to meet future liquidity needs for the next twelve months. As of December 31,
2009, the Company had $0.9 million available under the SVB Line.
Use
of Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
For
purposes of financial statement presentation, the Company considers all highly
liquid instruments with initial maturities of ninety days or less to be cash
equivalents.
F-7
Concentrations
of Credit Risk
The
Company’s assets that are exposed to credit risk consist primarily of cash and
cash equivalents and accounts receivable. Accounts receivable consist primarily
of billed and unbilled amounts, including indirect cost rate variances, due from
various agencies of the federal government or prime contractors doing business
with the federal government, and other commercial customers. The Company
historically has not experienced significant losses related to accounts
receivable and therefore, believes that credit risk related to accounts
receivable is minimal. The Company maintains cash balances that may at times
exceed federally insured limits. The Company maintains this cash at high-credit
quality institutions and, as a result, believes credit risk related to its cash
is minimal.
Revenue
Recognition
Substantially
all of the Company’s revenue is derived from service and solutions provided to
the federal government by Company employees and subcontractors.
The
Company generates its revenue from three different types of contractual
arrangements: (i) time and materials contracts, (ii) cost-plus reimbursement
contracts, and (iii) fixed price contracts.
Time and
Materials (“T&M”). For T&M contracts, revenue is recognized based on
direct labor hours expended in the performance of the contract by the contract
billing rates and adding other billable direct costs.
Cost-Plus
Reimbursement (“CP”). Under CP contracts, revenue is recognized as costs are
incurred and include an estimate of applicable fees earned. For award based fees
under CP contracts, the Company recognizes the relevant portion of the expected
fee to be awarded by the client at the time such fee can be reasonably estimated
and collection is reasonably assured based on factors such as prior award
experience and communications with the client regarding
performance.
Fixed
Price (“FP”). The Company has two basic categories of FP contracts: (i) fixed
price-level of effort (“FP-LOE”) and (ii) firm fixed price (“FFP”).
·
|
Under
FP-LOE contracts, revenue is recognized based upon the number of units of
labor actually delivered multiplied by the agreed rate for each unit of
labor. Revenue on fixed unit price contracts, where specific units of
output under service agreements are delivered, is recognized as units are
delivered based on the specific price per unit. For FP maintenance
contracts, revenue is recognized on a pro-rata basis over the life of the
contract.
|
·
|
Under
FFP contracts, revenue is generally recognized subject to the provision of
the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
For those contracts that are within the scope of Accounting Standards
Codification (“ASC”) 605-35, “Revenue Recognition; Construction-Type and
Production-Type Contracts,” revenue is recognized on the
percentage-of-completion method using costs incurred in relation to total
estimated costs.
|
In
certain arrangements, the Company enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting. Revenue is
recognized separately in accordance with the Company's revenue recognition
policy for each element. Further, if an arrangement requires the delivery or
performance of multiple deliveries or elements under a bundled sale, the Company
determines whether the individual elements represent "separate units of
accounting" under the requirements of ASC 605-25, “Revenue Recognition; Multiple
Element Arrangements,” and allocates revenue to each element based on relative
fair value.
Software
revenue recognition for sales of OpsPlanner is in accordance with ASC 985-605,
“Software Revenue Recognition.” Since the Company has not yet established
vendor specific objective evidence of fair value for the multiple elements
typically contained within an OpsPlanner sale, revenue from the sale of
OpsPlanner is recognized ratably over the term of the contract.
F-8
In
certain contracts, revenue includes third-party hardware and software purchased
on behalf of clients. The level of hardware and software purchases made for
clients may vary from period to period depending on specific contract and client
requirements. The Company recognizes the gross revenue under ASC 605-45,
“Revenue Recognition; Principal Agent Considerations,” for certain of its
contracts which contain third-party products and services, because in those
contracts, the Company is contractually bound to provide a complete solution
which includes labor and additional services in which the Company maintains
contractual, technical and delivery risks for all services and agreements
provided to the customers, and the Company may be subject to financial penalties
for non-delivery.
The
Company is subject to audits from federal government agencies. The Company has
reviewed its contracts and believes there is no material risk of any significant
financial adjustments due to government audit. To date, the Company has not had
any adjustments as a result of a government audit of its contracts.
Revenue
recognized on contracts for which billings have not yet been presented to
customers is included in unbilled receivables.
Deferred
revenue relates to contracts for which customers pay in advance for services to
be performed at a future date. The Company recognizes deferred revenue
attributable to its software and maintenance contracts over the related service
periods.
Cost
of Revenue
Cost of
revenue for service contracts consists primarily of labor, consultant,
subcontract, materials, travel expenses and an allocation of indirect costs
attributable to the performance of the contract.
Cost of
revenue for repair and maintenance contracts consist primarily of labor,
consultant, subcontract, materials, travel expenses and an allocation of
indirect costs attributable to the performance of the contract. Certain costs
are deferred based on the recognition of revenue for the associated
contracts.
Major
Customers
All of
the Company’s revenue is from federal agencies and 74% and 66% of total revenue
was generated from three major customers during the years ended December 31,
2009 and 2008, respectively. The Company’s accounts receivable related to these
major customers was 70% and 63% of total accounts receivable as of December 31,
2009 and 2008, respectively. The Company defines major customer by agencies
within the federal government.
A
majority of the Company’s customer concentration is in the Mid-Atlantic states
of the USA.
Goodwill
and Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets acquired in
business combinations. Pursuant to ASC 350, “Intangibles-Goodwill and Other,”
goodwill and intangible assets with indefinite lives are not amortized, but
instead are tested for impairment at least annually. ASC 350-30 also
requires that identifiable intangible assets with estimable useful lives be
amortized over their estimated useful lives, and reviewed for impairment in
accordance with ASC 360-10, “Property, Plant, and Equipment.” The Company
recorded $4.0 million of goodwill and $1.8 million of identifiable intangible
assets related to contract backlog associated with the Trinity and CTS
acquisitions. The contract backlog will be amortized over their estimated useful
lives of five years and is included under the caption “Intangible Assets” on the
Company’s consolidated balance sheets.
F-9
The
Company conducts a review for impairment of goodwill at least annually.
Additionally, on an interim basis, the Company assesses the impairment of
goodwill and intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors that the
Company considers important which could trigger an impairment review include
significant underperformance relative to historical or expected future operating
results significant changes in the manner or use of the acquired assets or the
strategy for the overall business, significant negative industry or economic
trends or a decline in the Company’s stock price for a sustained period.
Goodwill and intangible assets are subject to impairment to the extent the
Company’s operations experience significant negative results. These negative
results can be the result of the Company’s individual operations or negative
trends in the Company’s industry or in the general economy, which impact the
Company. To the extent the Company’s goodwill and intangible assets are
determined to be impaired then these balances are written down to their
estimated fair value on the date of the determination.
The
Company completed its annual testing for impairment of goodwill and intangible
assets as of December 31, 2009. The analysis indicated that no impairment exists
as of December 31, 2009.
Impairment
of Long-Lived Assets
In
accordance with ASC 360-10, “Property, Plant, and Equipment”, the Company
periodically evaluates the recoverability of its long-lived assets. This
evaluation consists of a comparison of the carrying value of the assets with the
assets’ expected future cash flows, undiscounted and without interest costs.
Estimates of expected future cash flows represent management’s best estimate
based on reasonable and supportable assumptions and projections. If the expected
future cash flow, undiscounted and without interest charges, exceeds the
carrying value of the asset, no impairment is recognized. Impairment
losses are measured as the difference between the carrying value of long-lived
assets and their fair market value, based on discounted future cash flows of the
related assets. The Company believes that the carrying value of its long-lived
assets are fully realizable as of December 31, 2009.
Accounts
Receivable
Accounts
receivable are customer obligations due under normal trade terms. The Company
provides an allowance for uncollectible accounts receivable based on historical
experience, troubled account information and other available information.
After all attempts to collect a receivable have failed, the receivable is
written off against the allowance. Although it is reasonably possible that
management’s estimate for uncollectible accounts could change in the near
future, management is not aware of any events that would result in a change
to its estimate which would be material to the Company’s financial position
or results of operations.
Property
and Equipment
Property
and equipment are recorded at the original cost to the Company and are
depreciated using straight-line methods over established useful lives of three
to seven years. Purchased software is recorded at original cost and depreciated
on the straight-line basis over three years. Leasehold improvements are recorded
at original cost and are depreciated on the straight-line basis over the shorter
of the useful life of the asset or the life of the lease.
Type
|
Depreciable
life
|
|
Furniture
& fixtures
|
7
years
|
|
Equipment
|
3
— 7 years
|
|
Software
|
3
years
|
|
Leasehold
improvements
|
Shorter
of the asset life or life of
lease
|
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes.”
Under ASC 740, the Company recognizes deferred income taxes for all temporary
differences between the financial statement basis and the tax basis of assets
and liabilities at currently enacted income tax rates.
F-10
ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC 740 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. Based on the evaluation, the Company
has concluded that there are no significant uncertain tax positions requiring
recognition in the financial statements. If the Company is required to recognize
any interest and penalties accrued related to unrecognized tax benefits, such
amounts will be recognized as tax expense. To date, the Company has not
recognized such interest or penalties.
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be
realized.
Net
Loss Per Common Share
Basic and
diluted per common share amounts are presented in accordance with ASC 260,
“Earning Per Share.” Basic per common share amounts are calculated by dividing
the net loss by the weighted average number of common shares outstanding during
the period. Diluted per common share amounts are calculated using the weighted
average number of common shares giving effect to all dilutive potential common
shares outstanding during the period, including stock options, restricted common
stock, convertible preferred stock, warrants and promissory notes if the impact
would be anti-dilutive. Calculations of the weighted average number of basic and
diluted common shares are presented in Note 12.
Share-Based
Compensation
The
Company currently has one equity incentive plan, the 2006 Stock Incentive Plan
(“the Plan”), which provides the Company the opportunity to compensate selected
employees with stock options. A stock option entitles the recipient to purchase
shares of common stock from the Company at the specified exercise price. All
grants made under the Plan are governed by written agreements between the
Company and the participants.
The
Company uses the Black-Scholes option-pricing model to value all options and the
straight-line method to amortize this fair value as compensation cost over the
requisite service period, which is the vesting period. Total share-based
compensation expense included in general and administrative expenses in the
accompanying consolidated statements of operations for the years ended December
31, 2009 and 2008 was $577 thousand and $622 thousand, respectively. The Company
did not grant any share-based awards during the year ended December 31, 2009 and
there were no exercises of stock options during 2009 and 2008.
The
Company will reconsider the use of the Black-Scholes model if additional
information becomes available in the future that indicates another model would
be more appropriate, or if grants issued in future periods have characteristics
that cannot be reasonably estimated under this model.
In
accordance with ASC 718, the Company reports the benefit of tax deductions in
excess of recognized stock compensation expense, or excess tax benefits,
resulting from the exercise of stock options as financing cash inflows in its
consolidated statements of cash flows.
The
Company accounts for equity instruments issued to non-employees in accordance
with ASC 718 and ASC 505-50, “Equity-Based Payments to
Non-Employees.”
The
following assumptions were used for option grants during the year ended December
31, 2008. No options were granted during the year ended December 31,
2009:
Dividend
Yield — The Company has never declared or paid dividends on its common stock and
has no plans to do so in the foreseeable future.
Risk-Free
Interest Rate — Risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term approximating the expected life of the option term
assumed at the date of grant.
Expected
Volatility — Volatility is a measure of the amount by which a financial variable
such as a share price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. The expected volatility is
based on the historical volatility of the Company’s common stock for the periods
that it has been publicly traded.
F-11
Expected
Term of the Options — This is the period of time that the options granted are
expected to remain unexercised. The Company estimates the expected life of the
option term based on an estimated average life of the options granted. Effective
January 1, 2008, the Company estimated the expected life based on the reported
data for a peer group of publicly traded companies for which historical
information was available.
Forfeiture
Rate — The Company estimates the percentage of options granted that are expected
to be forfeited or canceled on an annual basis before stock options become fully
vested. The Company uses the forfeiture rate that is a blend of past turnover
data and a projection of expected results over the following twelve month period
based on projected levels of operations and headcount levels at various
classification levels with the Company.
The fair
value of the common stock issued is based on the fair market value of the stock
on the date of the award. The fair value of options granted in 2008 was
estimated on the date of the grant with the following assumptions.
2008
|
||||
Dividend
yield
|
None
|
|||
Risk-free
interest rate
|
3.76 | % | ||
Expected
volatility
|
132.26 | % | ||
Expected
term of options
|
4.5
years
|
No
options were granted during the year ended December 31, 2009.
Segment
Reporting
ASC 280,
“Segment Reporting” establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information about
operating segments in interim financial reports. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Management has concluded that the Company operates in one
segment based upon the information used by management in evaluating the
performance of its business and allocating resources and capital.
Recently Issued
Accounting Standards – Not Yet Adopted
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
“. This ASU requires
some new disclosures and clarifies some existing disclosure requirements about
fair value measurement as set forth in ASC Subtopic 820-10. The FASB’s objective
is to improve these disclosures and, thus, increase transparency in financial
reporting. Specifically, ASU 2010-06 amends ASC Subtopic 820-10 to now require a
reporting entity to disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers; and in the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and settlements. In addition, ASU
2010-06 clarifies certain requirements of the existing disclosures. ASU 2010-06
is effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is in the process of evaluating the impact the amendments to ASC 820-10
will have on its consolidated finance statements.
In October 2009, the FASB issued
ASU 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the
FASB Emerging Issues Task Force to amend certain guidance in FASB Accounting
Standards CodificationTM (ASC) 605, Revenue
Recognition, 25, “Multiple-Element Arrangements”. The amended guidance in
ASC 605-25 (1) modifies the separation criteria by eliminating the
criterion that requires objective and reliable evidence of fair value for the
undelivered item(s), and (2) eliminates the use of the residual method of
allocation and instead requires that arrangement consideration be allocated, at
the inception of the arrangement, to all deliverables based on their relative
selling price. The FASB also issued ASU 2009-14, “Certain Revenue
Arrangements That Include Software Elements – a consensus of the FASB Emerging
Issues Task Force” to amend the scope of arrangements under ASC 985,
“Software”, 605, “Revenue Recognition” to exclude tangible products
containing software components and non-software components that function
together to deliver a product’s essential functionality. The amended guidance in ASC 605-25 and
ASC 985-605 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010,
with early application and retrospective application permitted. The Company
expects to prospectively apply the amended guidance in ASC 985-605, concurrently
with the amended guidance in ASC 605-25, beginning on January 1, 2011. The
Company is in the process of evaluating the impact the amendments to ASC 605-25
and ASC 985-605 will have on its consolidated finance
statements.
F-12
In June
2009, the FASB issued guidance to replace the calculation for determining which
entities, if any, have a controlling financial interest in a variable interest
entity (“VIE”) from a quantitative based risks and rewards calculation, to a
qualitative approach that focuses on identifying which entities have the power
to direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and, the obligation to absorb losses of
the entity or the right to receive benefits from the entity. This standard also
requires ongoing assessments as to whether an enterprise is the primary
beneficiary of a VIE (previously, reconsideration was only required upon the
occurrence of specific events), modifies the presentation of consolidated VIE
assets and liabilities, and requires additional disclosures about a company’s
involvement in VIEs. This guidance will be effective for the Company beginning
January 1, 2010. Management does not anticipate the statement to have a
material impact as the Company does not currently hold any variable
interests.
Recently
Adopted Accounting Standards
In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events” (“ASU 2010-09”),
effective immediately, which amends ASC 855-10 to clarify that an SEC filer is
not required to disclose the date through which subsequent events have been
evaluated in the financial statements. The adoption of ASU 2010-09 did not
materially impact the Company’s consolidated financial statements.
In
September 2009, the FASB issued ASU No. 2009-12, “Fair Value Measurements and
Disclosure” (“ASU 2009-12”). This standard provides additional guidance on using
the net asset value per share, provided by an investee, when estimating the fair
value of an alternate investment that does not have a readily determinable fair
value and enhances the disclosures concerning these investments. Examples of
alternate investments, within the scope of this standard, include investments in
hedge funds and private equity, real estate, and venture capital partnerships.
The adoption of ASU 2009-12 did not have a material impact on the Company’s
consolidated financial statements as the Company does not currently have any
investments measured at net asset value.
In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”
(“ASU 2009-05”). ASU 2009-05 amends ASC Topic 820, “Fair Value
Measurements”. Specifically, ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or
similar liabilities when traded as assets and/or 2) a valuation technique that
is consistent with the principles of Topic 820 of the ASC (e.g. an income
approach or market approach). ASU 2009-05 also clarifies that when estimating
the fair value of a liability, a reporting entity is not required to adjust to
include inputs relating to the existence of transfer restrictions on that
liability. The adoption of ASU 2009-05 did not have a material impact
on the Company’s consolidated financial position or results of operations;
however, this standard may impact the Company in future periods.
On July
1, 2009, the Company adopted ASU 2009-01 “FASB Accounting Standards
Codification.” This
guidance confirms that the FASB Accounting Standards Codification (the
“Codification”) becomes the single official source of authoritative
U.S. GAAP (other than guidance issued by the SEC), superseding existing
FASB, American AICPA, EITF, and related literature. After that date, only one
level of authoritative U.S. GAAP will exist. All other literature will be
considered non-authoritative. The Codification does not change U.S. GAAP;
instead, it introduces a new structure that is organized in an easily
accessible, user-friendly online research system. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
On June
30, 2009, the Company adopted provisions of ASC 825, “Financial Instruments”,
which requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of ASC 825 did not have a material impact on the
Company’s statement of operations, financial position, or cash
flows.
On June
30, 2009, the Company adopted ASC 855, “Subsequent Events,” which establishes
general standards of accounting and disclosure for events that occur after the
balance sheet date but before the financial statements are issued. The adoption
of ASC 855 did not have a material impact on the Company’s statements of
operations, financial position, or cash flows.
F-13
On
January 1, 2009, the Company adopted ASC 815, “Derivatives and Hedging.” The
statement modifies and expands the disclosure requirements for derivative
instruments and hedging activities. ASC 815 requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires quantitative disclosures about fair value amounts and
gains and losses on derivative instruments. It also requires disclosures about
credit-related contingent features in derivative agreements. The adoption of ASC
815 did not have a material impact on the Company’s statements of operations,
financial position or cash flows.
On
January 1, 2009, the Company adopted ASC 810, “Consolidation.” The statement
establishes the accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
adoption of ASC 810 did not have a material impact on the Company’s statements
of operations, financial position or cash flows as the Company does not have any
noncontrolling interests in other active companies.
On
January 1, 2009, the Company adopted ASC 805, “Business Combinations.” The
statement establishes principles and requirements for how the acquirer
recognizes and measures the identifiable assets acquired, the goodwill acquired,
the liabilities assumed and any noncontrolling interest in the acquiree and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This standard did not have immediate impact upon adoption by the
Company, but will result in items such as transaction and acquisition
related-restructuring costs with respect to business combinations closing after
December 31, 2008 being charged to expense when incurred. The Company will
apply this ASC when evaluating potential future transactions to which it would
apply.
Reclassification
Certain
reclassifications have been made to the Consolidated Financial Statements of
Paradigm Holdings for all prior fiscal years presented to conform to the
presentation in fiscal year 2009.
2.
FAIR VALUE MEASUREMENTS
In
accordance with ASC 820, “Fair Value Measurements and Disclosures,” a fair value
measurement is determined based on the assumptions that a market participant
would use in pricing an asset or liability. ASC 820 also established a
three-tiered hierarchy that draws a distinction between market participant
assumptions based on (i) observable inputs such as quoted prices in active
markets (Level 1), (ii) inputs other than quoted prices in active markets
that are observable either directly or indirectly (Level 2) and (iii)
unobservable inputs that require the Company to use present value and other
valuation techniques in the determination of fair value (Level 3).
The
following table represents our financial assets and liabilities measured at fair
value on a recurring basis and the basis for that measurement:
Fair Value Measurement at December 31, 2009 Using:
|
||||||||||||||||
Quoted Price in
|
Significant
|
|||||||||||||||
Active Markets
|
Other
|
Significant
|
||||||||||||||
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
Total Fair Value
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
Measurement
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Put
warrants
|
$ | 1,447,075 | $ | — | $ | 1,447,075 | $ | — |
The
Company values the put warrants using the Black-Scholes model with the
following assumptions:
December 31, 2009
|
|
Exercise
price
|
$0.078
& $0.0858
|
Underlying
common stock price
|
$0.05
|
Volatility
|
122.2%
|
Contractual
term
|
6.16
years
|
Risk
free interest rate
|
3.39%
|
Common
stock dividend rate
|
0%
|
Dilution
factor
|
22.6%
|
F-14
In
accordance with ASC 815, the Company has classified the fair value of the
warrants as a liability and changes in the fair value of the warrants are
recognized in the earnings of the Company as long as the warrants remain
classified as a liability.
The
Company’s financial instruments also include cash and cash equivalents, accounts
receivable, accounts payable, note payable - line of credit, and mandatorily
redeemable preferred stock. The fair values of cash and cash equivalents,
accounts receivable, accounts payable and note payable - line of credit
approximated the carrying values based on market interest rates and the time to
maturity. The mandatorily redeemable preferred stock was initially valued using
the discounted cash flow method based on the weighted average cost of capital of
29%, and subsequently accreted to the redemption amount using the effective
interest method. At December 31, 2009, the estimated fair values and carrying
amounts of the mandatorily redeemable preferred stock was $5.1
million.
3.
ACCOUNTS RECEIVABLE
Accounts
receivable consists of billed and unbilled amounts under contracts in progress
with governmental units, principally, the Office of the Comptroller of the
Currency, the Department of State, and the Internal Revenue Service for 2009 and
2008. The components of accounts receivable are as follows:
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
Billed
receivables
|
$ | 3,224,008 | $ | 3,826,514 | ||||
Unbilled
receivables
|
2,295,142 | 3,094,254 | ||||||
Total
accounts receivable – contracts, net
|
$ | 5,519,150 | $ | 6,920,768 |
All
receivables are expected to be collected within the next twelve months and are
pledged to SVB as collateral for the Loan and Security Agreement with SVB. The
Company reclassified $0.5 million receivable from one customer to other
non-current assets during 2009 based on the payment arrangement made with the
customer. The Company's unbilled receivables are comprised of contract costs
that cover the current service period and are normally billed in the following
month and do not include the offset of any advances received. In general, for
cost-plus and time and material contracts, invoicing of the unbilled receivables
occurs when contractual obligations or milestones are met. Invoicing for firm
fixed price contracts occurs on delivery and acceptance. The Company's unbilled
receivables at December 31, 2009 do not contain retainage. All advance payments
received, if any, are recorded as deferred revenue.
The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the historical trends and other information of the government
agencies it conducts business with. Such losses have been within management's
expectations. The Company reserved $20,733 as an allowance for doubtful accounts
related to certain customers at December 31, 2009 and 2008.
4.
PREPAID EXPENSES
Prepaid
expenses at December 31, 2009 and 2008, consist of the following:
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
Prepaid
insurance, rent and software maintenance agreements
|
$ | 119,058 | $ | 136,357 | ||||
Contract-related
prepaid expenses
|
379,078 | 618,439 | ||||||
Other
prepaid expenses
|
375,798 | 279,041 | ||||||
Total
prepaid expenses
|
$ | 873,934 | $ | 1,033,837 |
F-15
5.
PROPERTY AND EQUIPMENT
Property
and equipments are as follows:
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
Furniture
and fixtures
|
$ | 92,411 | $ | 109,445 | ||||
Equipment
|
746,917 | 778,121 | ||||||
Software
|
563,082 | 528,768 | ||||||
Leasehold
improvement
|
39,150 | 43,194 | ||||||
Total
property and equipment
|
1,441,560 | 1,459,528 | ||||||
Accumulated
depreciation
|
(1,314,467 | ) | (1,275,916 | ) | ||||
Property
and equipment, net
|
$ | 127,093 | $ | 183,612 |
Depreciation
and amortization expense included in selling, general and administrative
expenses in the accompanying consolidated statements of operations for the years
ended December 31, 2009 and 2008 was $87,834 and $241,182,
respectively.
6.
DEFERRED FINANCING COSTS
Deferred
financing costs are as follows:
December 31, 2009
|
December 31, 2008
|
|||||||
Financing
costs
|
$ | 1,175,078 | $ | — | ||||
Accumulated
amortization
|
(326,784 | ) | — | |||||
Net
carrying amount
|
$ | 848,294 | $ | — |
Financing
costs incurred are amortized over the life of the associated financing
arrangements using the effective interest rate method. Amortization expense
included in interest expense in the accompanying consolidated statements of
operations for the year ended December 31, 2009 was $326,784. There was no
amortization expense for the year ended December 31, 2008. Anticipated
future amortization is as follows:
For
the years ending December 31,
|
||||
2010
|
$ | 404,970 | ||
2011
|
399,870 | |||
2012
|
43,454 |
7.
INTANGIBLE ASSETS
Intangible
assets are as follows:
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
Contract
backlog
|
$ | 1,810,000 | $ | 1,810,000 | ||||
Accumulated
amortization
|
(912,682 | ) | (565,409 | ) | ||||
Net
carrying amount
|
$ | 897,318 | $ | 1,244,591 |
F-16
The
Company recorded $1.8 million of contract backlog associated with the Trinity
and CTS acquisitions. These intangible assets are being amortized over a period
of five years and have no residual value at the end of their useful lives.
Amortization expense included in selling, general and administrative expenses in
the accompanying consolidated statements of operations for the years ended
December 31, 2009 and 2008 was $347,273. The Company estimates that it will
incur the following amortization expense for the future periods indicated
below.
For
the years ending December 31,
|
||||
2010
|
$ | 347,273 | ||
2011
|
347,273 | |||
2012
|
202,772 |
8.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses are as follows:
Dec. 31, 2009
|
Dec. 31, 2008
|
|||||||
Accounts
payable
|
$ | 1,995,925 | $ | 2,969,262 | ||||
Accrued
expenses
|
337,160 | 529,428 | ||||||
Total
accounts payable and accrued expenses
|
$ | 2,333,085 | $ | 3,498,690 |
9.
DEBTS
At
December 31, 2009 and 2008, outstanding debts consisted of the
following:
December 31, 2009
|
December 31, 2008
|
|||||||
Current
debts:
|
||||||||
Note
payable – line of credit
|
$ | 3,643,653 | $ | 5,949,983 | ||||
Notes
payable – promissory notes
|
— | 2,000,000 | ||||||
Mandatorily
redeemable preferred stock, current portion
|
500,000 | — | ||||||
Total
current debt
|
$ | 4,143,653 | $ | 7,949,983 | ||||
Long-term
debts:
|
||||||||
Mandatorily
redeemable preferred stock
|
$ | 6,206,000 | $ | — | ||||
Less:
unamortized discount
|
(1,527,411 | ) | — | |||||
Add:
Accretion of preferred stock
|
408,546 | — | ||||||
Carrying
amount
|
5,087,135 | — | ||||||
Less:
current portion
|
(500,000 | ) | — | |||||
Mandatorily
redeemable preferred stock, net of current portion
|
$ | 4,587,135 | $ | — | ||||
Put
warrants
|
$ | 1,447,075 | $ | — | ||||
Total
long-term debt, net of current portion
|
$ | 6,034,210 | $ | — |
F-17
Note
Payable – Line of Credit
On March
13, 2007, the Company entered into two Loan and Security Agreements with SVB,
one of which provided for a revolving credit facility of up to $10 million and
the other of which provided for a working capital line of credit of up to $12
million. SVB and the Company have agreed that the revolving credit facility has
no further force or effect. The Company continues to use the working capital
line of credit to borrow funds for working capital and general corporate
purposes. References to the Loan and Security Agreement in this description
refer to the working capital line of credit agreement. The Loan and Security
Agreement is secured by a first priority perfected security interest in any and
all properties, rights and assets of the Company, wherever located, whether now
owned or thereafter acquired or arising and all proceeds and products thereof as
described in the Loan and Security Agreement.
Under the
Loan and Security Agreement, the line of credit is due on demand and interest is
payable monthly based on a floating per annum rate equal to the aggregate of the
Prime Rate plus the applicable spread which ranges from 1.00% to 2.00%, as well
as other fees and expenses as set forth more fully in the agreements. The Loan
and Security Agreement requires the Company to maintain certain EBITDA covenants
as specified in the Loan and Security Agreement. Because the Company was not in
compliance with the EBITDA covenant at June 30, 2008, the Company and SVB
amended the Loan and Security Agreement to waive the covenant compliance for the
periods ended June 30 and July 31, 2008. On March 18, 2009, the Company and
SVB entered into a Second Loan Modification Agreement. This Second Loan
Modification Agreement amended the Loan and Security Agreement to extend the
maturity date to May 12, 2009 and modify the funds available under the working
capital line of credit facility to not exceed $4.5 million and the total funds
available under the Loan and Security Agreement to a maximum amount of $5.625
million. The interest rates and EBITDA covenant are consistent with the previous
agreement for the remainder of the extension period. On May 4, 2009, the Company
and SVB entered into a Third Loan Modification Agreement. This Third Loan
Modification Agreement amended the Loan and Security Agreement to extend the
maturity date to June 12, 2009.
On July
2, 2009, the Company and SVB entered into a Fourth Loan Modification Agreement.
This Fourth Loan Modification Agreement, among other things, (i) modified the
collateral handling fee payable by the Company, (ii) revised certain of the
Company’s representations and warranties, (iii) increased the charge to the
Company for certain inspections and audits from $750 per person per day to $850
per person per day, (iv) revised the Company’s financial covenants, (v) revised
the negative covenant regarding the Company’s ability to pay dividends or make
any distribution or payment or redeem, retire or repurchase any capital stock
without the prior consent of SVB to allow for such payments (subject to certain
restrictions) to certain holders of the Company’s Series A-1 Senior Preferred
Stock, (vi) amended the definitions of “Prime Rate”, “Applicable Rate” and
“EBITDA” and (vii) extended the maturity date to June 11, 2010. The Company was
in compliance with the EBITDA covenant set forth in Section 6.7(b) of the Loan
and Security Agreement as of the three month period ended December 31, 2009. As
of December 31, 2009, the Company had $3.6 million outstanding, and $0.9
million additional availability, under its working capital line of
credit with SVB.
The Loan
and Security Agreement contains events of default that include among other
things, non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties, cross default to certain other
indebtedness, bankruptcy and insolvency events, change of control and material
judgments. Upon occurrence of an event of default, SVB is entitled to, among
other things, accelerate all obligations of the Company and sell the Company's
assets to satisfy the Company's obligations under the Loan and Security
Agreement. As of December 31, 2009, no events of default had
occurred.
Notes
Payable – Promissory Notes
On April
9, 2007, the Company issued $4.0 million of promissory notes to the former
shareholders of Trinity to finance the acquisition of Trinity.
Under the
terms of the promissory notes, the Company was required to repay the principal
plus interest at the annual rate of 7.75% of the unpaid balance pursuant to the
following terms:
(a) $500
thousand was required to be paid within three business days of April 9,
2007;
(b) $1.5
million (the "Second Amount") was required to be paid on June 30, 2007;
and
(c) the
remainder amount (the "Remainder Amount") of $2.0 million was required be paid
on October 31, 2008.
F-18
Effective
as of October 31, 2008, the Company negotiated an amendment to the promissory
notes that extended the payment date of the Remainder Amount from October 31,
2008 to December 15, 2008 in exchange for a cash fee of $40,000 plus accrued and
unpaid interest based on the original terms. If the Company failed to pay the
Remainder Amount by December 15, 2008, the Company was required to pay an amount
equal to $60,000 plus all accrued and unpaid interest through December 15, 2008.
If the Company failed to pay the amounts owed under the promissory note by
December 15, 2008, interest was to accrue, at a rate equal to 12% per annum, on
such amounts. The Company did not pay the Reminder Amount prior to December 15,
2008. The failure by the Company to pay the Remainder Amount on or before
December 15, 2008 did not constitute a default under the promissory notes. The
Company and Christian Kleszewski (the Company’s Vice President (Trinity, IMS))
separately agreed that the $1.0 million portion of the promissory note payable
to Mr. Kleszewski was to be due in January 2009. The Company used a portion of
the proceeds from the private placement described below to pay the notes in full
on February 27, 2009.
Mandatorily
Redeemable Preferred Stock and Warrants
On
February 27, 2009, the Company completed a private placement to a group of
investors led by Hale Capital Partners, LP (“the Purchasers”) for gross proceed
of $6.2 million. The Company issued 6,206 shares of Series A-1 Preferred Stock,
which bear an annual dividend of 12.5%. Each share of Series A-1 Preferred Stock
has an initial stated value of $1,000 per share (the “Stated Value”). The
private placement included 7-year Class A Warrants to purchase an aggregate of
79,602,604 shares of Common Stock at an exercise price of $0.0780 per share and
7-year Class B Warrants to purchase an aggregate of 69,062,248 shares of Common
Stock at an exercise price of $0.0858 per share (collectively, the “Warrants”).
We refer to the Class A Warrants, the Class B Warrants and the Series A-1
Preferred Stock collectively as the “Securities”. Except for the exercise price
and number of shares of Common Stock subject to the Warrants, the terms of the
Class A Warrants and the Class B Warrants are substantially similar. In
addition, the Class A Warrants are subject to extension for an additional seven
years if the Company has not met certain milestones. The Warrants may be
exercised for cash or on a cashless exercise basis. The Warrants are
subject to full ratchet anti-dilution provisions and other customary
anti-dilution provisions as described therein. The Warrants further provide that
in the event of certain fundamental transactions or the occurrence of an event
of default under the Certificate of Designations that the holder of the Warrants
may cause the Company to repurchase such Warrants for the purchase price
specified therein. Among the use of proceeds, $2.1 million was used to pay off
the promissory note issued in connection with our acquisition of Trinity, we
paid fees and transaction costs of approximately $1.1 million and we used the
remaining $3.0 million to pay down debt and for general working capital
purposes.
Voting
The
holders of Series A-1 Preferred Shares are entitled to vote together with the
common stock on all matters and in the same manner. Each share of the
Series A Preferred Stock shall entitle the holders to the number of votes equal
to the number of shares of the common stock issuable upon exercise of all Class
A Warrants held by such holder as of the record date for the vote.
Dividends
The
holders of the Series A-1 Preferred Stock are entitled to receive cumulative
dividends at the rate of 12.5% per annum, accruing on a daily basis and
compounding monthly, with 40% of such dividends payable in cash and 60% of such
dividends payable by adding such amount to the Stated Value per share of the
Series A-1 Preferred Stock. The dividend shall be paid on a monthly basis to the
holders of Series A-1 Preferred Stock entitled to receive such
dividends.
Liquidation
Upon the
occurrence of a liquidation event (including certain fundamental transactions),
the holders of the Series A-1 Preferred Stock are entitled to receive prior and
in preference to the payment of any amounts to the holders of any other equity
securities of the Company (the “Junior Securities”) (i) 125% of the Stated Value
of the outstanding shares of Series A-1 Preferred Stock, (ii) all accrued but
unpaid cash dividends with respect to such shares of Series A-1 Preferred Stock
and the (iii) specified repurchase prices with respect to all Warrants (as
defined below) held by such holders.
F-19
Redemption
The
Certificate of Designations of the Series A-1 Preferred Stock provides that any
shares of Series A-1 Preferred Stock outstanding as of February 9, 2012 are to
be redeemed by the Company for their Stated Value plus all accrued but unpaid
cash dividends on such shares (the “Redemption Price”). In addition, on the
last day of each calendar month beginning February 2009 through and including
February 2010, the Company is required to redeem the number of shares of Series
A-1 Preferred Stock obtained by dividing 100% of all Excess Cash Flow (as
defined in the Certificate of Designations) with respect to such month by the
Redemption Price applicable to the shares to be redeemed. As of December 31,
2009, no redemptions with respect to any Excess Cash Flow had been made in
accordance with the restrictions placed by SVB. Further, on the last day of each
month beginning March 2010 through and including January 2012, the Company shall
redeem the number of shares of Series A-1 Preferred Stock obtained by dividing
the sum of $50,000 plus 50% of the Excess Cash Flow with respect to such month
by the Redemption Price applicable to the shares to be redeemed. At anytime
prior to February 9, 2012, the Company may redeem shares of Series A-1 Preferred
Stock for 125% of the Stated Value of such shares plus all accrued but unpaid
cash dividends for such shares. If at anytime a Purchaser realizes cash proceeds
with respect to the Securities or common stock received upon exercise of the
Warrants equal to or greater than the aggregate amount paid by the Purchaser for
the Securities plus 200% of such amount then the Company has the option to
repurchase all outstanding shares of Series A-1 Preferred Stock held by that
Purchaser for no additional consideration.
Covenants
The
Preferred Stock Purchase Agreement and the Certificate of Designations also
contain certain affirmative and negative covenants. The negative covenants
require the prior approval of Hale Capital, for so long as (i) an aggregate of
not less than 15% of the shares of Series A-1 Preferred Stock purchased on
February 27, 2009 are outstanding, (ii) Warrants to purchase an aggregate of not
less than 20% of the shares issuable pursuant to the Warrants on February 27,
2009 are outstanding or (iii) the Purchasers, in the aggregate, own not less
than 15% of the common stock issuable upon exercise of all Warrants on February
27, 2009 (we refer to (i), (ii) and (iii) as the “Ownership Threshold”) in order
for the Company to take certain actions, including, among others, (i) amending
the Company’s Articles of Incorporation or other charter documents, (ii)
liquidating, dissolving or winding-up the Company, (iii) merging with,
consolidating with or acquiring or being acquired by, or selling all or
substantially all of its assets to, any person, (iv) selling, licensing or
transferring any capital stock or assets with a value, individually or in the
aggregate, of $100,000 or more, (v) undergoing certain fundamental transactions,
(vi) certain issuances of capital stock, (vii) certain redemptions or dividend
payments, (viii) the creation, incurrence or assumption of certain types of
indebtedness or liens, (ix) increasing or decreasing the size of the Company’s
Board of Directors and (x) appointing, hiring, suspending or terminating the
employment or materially modifying the compensation of any executive
officer.
The
Company accounts for its preferred stock based upon the guidance enumerated in
ASC 480, “Distinguishing Liabilities from Equity.” The Series A-1 Preferred
Stock is mandatorily redeemable on February 9, 2012 and therefore is classified
as a liability instrument on the date of issuance. The mandatorily redeemable
preferred stock was initially valued using the discounted cash flow method based
on the weighted average cost of capital of 29%, and subsequently accreted to the
redemption amount using the effective interest method. Interest expense related
to the mandatorily redeemable preferred stock included in other expense in the
accompanying consolidated statements of operations for the year ended December
31, 2009 was $1.4 million. There was no interest expense related to the
mandatorily redeemable preferred stock for the year ended December 31,
2008. The Warrants issued in connection with the Series A-1 Preferred Stock
provide that the holders of the Warrants may cause the Company to repurchase
such Warrants for the purchase price in the event of certain fundamental
transactions or the occurrence of an event of default. The Company evaluated the
Warrants pursuant to ASC 815-40 and determined that the Warrants should be
classified as liabilities because they contain a provision that could require
cash settlement and that event is outside the control of the Company. The
warrants should be measured at fair value, with changes in fair value reported
in earnings as long as the warrants remain classified as a liability. The
initial proceeds allocated to preferred shares and warrants were $4,299,274 and
$1,906,726, respectively. In connection with the Series A-1 Preferred Stock
issuance on February 27, 2009, the Company also issued warrants to the placement
agent to purchase 1,602,565 common shares of the Company at $0.078 per share.
Warrants issued were valued at $21 thousand, using the Black Scholes
model.
F-20
The
Company is amortizing the warrant discount using the effective interest rate
method over the three year term of the Series A-1 Preferred Stock. Although the
stated interest rate of the Series A-1 Preferred Stock is 12.5%, as a result of
the discount recorded for the warrants, the effective interest rate is 26.79%.
The Company also incurred $1,175,078 of costs in relation to this transaction,
which were recorded as deferred financing costs to be amortized over the term of
the Series A-1 Preferred Stock.
The
Company calculated the fair value of the warrants at the date of issuance using
the Black-Scholes option pricing model. The change in fair value of the Warrants
issued in connection with the Series A-1 Preferred stock from the date of
issuance to December 31, 2009, was a decrease of approximately $0.5 million from
$1.9 million as of February 27, 2009 to $1.4 million as of December 31, 2009.
This change of fair value of the Warrants was reflected as a component of other
expense within the statement of operations. For the year ended December 31,
2009, the change of fair value of the Warrants was $ ($0.5)
million.
10.
INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes.”
Under ASC 740, the Company recognizes deferred income taxes for all temporary
differences between the financial statement basis and the tax basis of assets
and liabilities at currently enacted income tax rates.
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be
realized.
ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC 740 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
The
Company concluded that there are no significant uncertain tax positions
requiring recognition in the financial statements based on an evaluation
performed for the tax years ended December 31, 2006, 2007, 2008 and 2009, the
tax years which remain subject to examination by major tax jurisdictions as of
December 31, 2009.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions, although any such assessments historically have been immaterial
to the financial results. As of December 31, 2009, the Company had recorded
immaterial interest and penalties associated with the filing of the 2008 tax
returns and no unrecognized tax benefits that would have an effect on the
effective tax rate. The Company elected to continue to report interest and
penalties as income taxes.
For the
years ended December 31, 2009 and 2008, the components of the provision for
income taxes from operations consisted of:
2009
|
2008
|
|||||||
Current
|
||||||||
Federal
|
$ | 137,745 | $ | 33,100 | ||||
State
|
38,997 | 35,563 | ||||||
Deferred
|
||||||||
Federal
|
(224,331 | ) | (357,867 | ) | ||||
State
|
(37,538 | ) | (52,935 | ) | ||||
Total
|
$ | (85,127 | ) | $ | (342,139 | ) |
F-21
The
provision for income taxes from operations for the years ended December 31, 2009
and 2008 reflected in the accompanying financial statements varies from the
amount which would have been computed using statutory rates as
follows:
2009
|
2008
|
|||||||
Tax
computed at the maximum federal statutory rate
|
$ | (461,674 | ) | $ | (380,533 | ) | ||
State
income tax, net of federal benefit
|
(21,317 | ) | (47,779 | ) | ||||
Other
permanent differences
|
334,278 | 57,519 | ||||||
Other
|
63,586 | 28,654 | ||||||
Benefit
for income taxes
|
$ | (85,127 | ) | $ | (342,139 | ) |
Deferred
income taxes arise from temporary differences between the tax basis of assets
and liabilities and their reported amount in the financial statements. A summary
of the tax effect of the significant components of deferred income taxes,
excluding discounted operations, follows:
2009
|
2008
|
|||||||
Section
481 adjustment due to conversion from cash basis to accrual basis for
income tax reporting
|
$ | (52,979 | ) | $ | (52,098 | ) | ||
Accrued
severance
|
— | 23,852 | ||||||
Accrued
officers' compensation and accrued vacation deducted for financial
statement reporting purposes but not for income tax reporting
purposes
|
65,387 | 58,916 | ||||||
Leases
payable
|
2,246 | 20,295 | ||||||
Allowance
for doubtful account
|
9,460 | 9,304 | ||||||
Net
deferred tax assets, current portion
|
$ | 24,114 | $ | 60,269 | ||||
|
||||||||
Section
481 adjustment due to conversion from cash basis to accrual basis for
income tax reporting
|
$ | — | $ | (52,098 | ) | |||
Share-based
compensation expense
|
642,033 | 476,719 | ||||||
Depreciation
and amortization expense reported for income tax purposes different from
financial statement amounts
|
(28,048 | ) | (30,699 | ) | ||||
Amortization
expense on intangible assets reported for income tax purposes different
from financial statement amounts
|
(137,134 | ) | (229,965 | ) | ||||
Deferred
rent assets
|
(19,026 | ) | (26,979 | ) | ||||
Deferred
rent liabilities
|
54,995 | 71,032 | ||||||
Leases
payable
|
— | 3,316 | ||||||
Net
deferred tax assets, net of current portion
|
$ | 512,820 | $ | 211,326 |
11.
LEASES
Operating
Leases
The
Company relocated its headquarters in June 2006 and entered into an operating
lease for the new office space. This lease expires in May 2012 and contains an
escalation clause for 3% annual increases in the base monthly rent. The Company
subleased two-thirds of the new office space on February 1, 2010. The Company
subleased the old headquarter’s office space which expires in May 2011 upon the
relocation. The Company has three other office leases assumed from acquisitions.
Two of them are from the Trinity acquisition. One of the leases expired in April
2009 and the other one expires in November 2010 and such leases contain an
escalation clause for 2% and 4% annual increases in the base month rent,
respectively. The third lease is from the CTS acquisition. The lease expired in
November 2008.
F-22
The
following is a schedule, by year, of future minimum rental payments required
under the operating leases and the cash inflows for sublease
income:
Office Space
|
Sublease Income
|
Total
|
||||||||||
Years
ending December 31, 2010
|
$ | 916,415 | $ | 680,925 | $ | 235,490 | ||||||
2011
|
612,090 | 397,542 | 214,548 | |||||||||
2012
|
174,420 | 87,795 | 86,625 | |||||||||
Total
|
$ | 1,702,925 | $ | 1,166,262 | $ | 536,663 |
Total
straight-line rent expense for the years ended December 31, 2009 and 2008 was
$854,158 and $903,353, respectively. Sublease income was $429,047 for the years
ended December 31, 2009 and 2008.
12.
NET LOSS PER COMMON SHARE
Net loss
per common share is presented in accordance with ASC 260, “Earnings Per Share.”
ASC 260 requires dual presentation of basic and diluted net income per common
share on the face of the income statement. Basic net income per common share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the
period. Diluted net income per common share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock, except for periods when the Company
reports a net loss because the inclusion of such items would be
antidilutive.
The
following is a reconciliation of the amounts used in calculating basic and
diluted net loss per common share.
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Basic
net loss per common share:
|
||||||||
Net
loss
|
$ | (1,272,737 | ) | $ | (777,075 | ) | ||
Dividends
on preferred stock
|
78,870 | 180,000 | ||||||
Net
loss attributable to common stockholders
|
$ | (1,351,607 | ) | $ | (957,075 | ) | ||
Weighted
average common shares outstanding - basic
|
37,535,548 | 19,148,153 | ||||||
Treasury
effect of stock options
|
— | — | ||||||
Total
weighted average common shares outstanding - diluted
|
37,535,548 | 19,148,153 | ||||||
Basic
net loss per common share
|
$ | (0.04 | ) | $ | (0.05 | ) | ||
Diluted
net loss per common share
|
$ | (0.04 | ) | $ | (0.05 | ) |
Common
stock equivalents of 129,712,521 and 5,970,922 were not included in the
computation of diluted net loss per common share for the years ended December
31, 2009 and 2008, respectively, as the inclusion of these common stock
equivalents would be anti-dilutive due to the Company’s net loss position and
including such shares would reduce the net loss per common share in those
periods.
F-23
In
connection with the private placement on February 27, 2009, the Company
exchanged of 1,700 shares of the Company’s outstanding Series A Preferred Stock
for an aggregate of approximately 21.8 million shares of common.
13.
RETIREMENT PLANS
The
Company maintains a 401(k) profit sharing retirement plan for all eligible
employees over 18 years old. Under the plan, employees become eligible to
participate after one month of employment. The annual contribution under this
plan is based on employee participation. The participants may elect to
contribute up to 100% of their gross annual earnings limited to amounts
specified in Internal Revenue Service Regulations as indexed for inflation. The
Company’s matching contribution to the plan is determined annually by the Board
of Directors. Effective October 1, 2007, the Company contributed an amount equal
to 100% of the first 4% of the employees’ contributions as a match. Employees
vest 100% in all salary reduction contributions. Rights to benefits provided by
the Company’s matching contributions vest immediately. Prior to October 1, 2007,
the Company contributed an amount equal to 100% of the first 3% of the
employees’ contributions as a match. Employees vest 100% in all salary reduction
contributions. Rights to benefits provided by the Company’s matching
contributions vest over a five year period. The Company’s contributions were
$354,832 and $225,223 for the years ended December 31, 2009 and 2008,
respectively.
14.
STOCK INCENTIVE PLAN
On August
3, 2006, the Board of Directors and stockholders approved the 2006 Stock
Incentive Plan (the “Plan”). A total of 2,500,000 shares of common stock were
initially reserved for issuance under the Plan. At December 31, 2009, 4,416,820
shares of common stock were reserved for issuance under the Plan. The shares of
common stock reserved for issuance under the Plan are in addition to
approximately 1,050,000 shares of common stock which have been reserved for
issuance related to standalone stock options that were granted by the Company to
employees and directors on December 15, 2005 and May 15, 2006. As of December
31, 2009, 2,925,000 shares of restricted common stock and options to purchase
507,000 shares of common stock have been issued under the Plan and options to
purchase 2,622,000 shares of common stock have been granted outside of the Plan.
Individual awards under the Plan may take the form of incentive stock options
and nonqualified stock options. To date, only nonqualified stock options have
been granted under the Plan. These awards generally vest over three years of
continuous service.
The
Compensation Committee administers the Plan, selects the individuals who will
receive awards and establishes the terms and conditions of those awards. Shares
of common stock subject to awards that have expired, terminated, or been
canceled or forfeited are available for issuance or use in connection with
future awards.
Stock
Options
Effective
December 15, 2005, the Board of Directors of the Company granted options to
acquire 2,122,000 shares of common stock to certain individuals. Approximately,
550,000 option shares remained outstanding as of December 31, 2009 as 1,572,000
option shares had been canceled. These options were vested as of December 15,
2005, have an exercise price equal to $1.70 per share, and expire on December
14, 2015. The Company did not modify the options granted in December 2005 during
2006. Effective May 15, 2006 and December 18, 2006, the Company granted options
to acquire 500,000 shares and 150,000 shares of common stock with exercise
prices equal to $2.50 per share and $0.75 per share, respectively, to two of its
officers pursuant to an offer of employment. The options expire on May 14, 2016
and December 18, 2016, respectively. Effective May 3, 2007, August 2, 2007 and
August 13, 2007, the Company granted options to acquire 50,000 shares, 157,000
shares and 25,000 shares of common stock with exercise prices equal to $0.80 per
share and $0.84 per share, respectively, to certain employees. The options
expire on May 2, 2017, August 1, 2017 and August 12, 2017, respectively.
Effective October 21, 2008, the Company granted options to acquire 125,000
shares of common stock to certain employees. The options have an exercise price
equal to $0.20 per share, and expire on October 20, 2018. One third of the
options will vest on each anniversary of the grant date. The options are
not intended to be incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended and will be interpreted
accordingly.
F-24
Additionally,
the Company approved a modification on stock options granted between December
15, 2005 and August 13, 2007 to reduce the exercise price of options to purchase
an aggregate of 1,453,000 shares of the Company’s common stock to $0.30 per
share on October 21, 2008. In accordance with ASC 718, “Compensation – Stock
Compensation”, a modification of the terms or conditions of an equity award
should be treated as an exchange of the original award for a new award. The
Company should recognize the fair value of the original awards plus the
incremental compensation cost associated with the modification. The Company
recognized $42 thousand of the incremental compensation immediately and the
remaining amount of $10 thousand is to be recognized over the remaining vesting
periods. Prior to such modification, the exercise prices of such options ranged
from $0.75 to $2.50 per share. All other terms of the options remained the same.
The options are held by 40 of the Company’s officers, directors and
employees.
The
following table summarizes the Company’s stock option activity.
Weighted
|
||||||||||||||||
Weighted
|
Average
|
|||||||||||||||
Average
|
Aggregate
|
Remaining
|
||||||||||||||
Number of
|
Exercise
|
Intrinsic
|
Contractual
|
|||||||||||||
Options
|
Price
|
Value
|
Life
|
|||||||||||||
(in years)
|
||||||||||||||||
Outstanding
at January 1, 2008
|
1,506,000 | $ | 1.74 | $ | 72,800 | 8.5 | ||||||||||
Granted
|
125,000 | 0.20 | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Canceled
|
(53,000 | ) | 1.70 | |||||||||||||
Outstanding
at December 31, 2008
|
1,578,000 | $ | 0.29 | $ | — | 7.6 | ||||||||||
Granted
|
— | — | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Canceled
|
(36,000 | ) | 0.27 | |||||||||||||
Outstanding
at December 31, 2009
|
1,542,000 | $ | 0.29 | $ | — | 6.6 | ||||||||||
Exercisable
at December 31, 2008
|
1,081,667 | $ | 0.30 | $ | — | 7.3 | ||||||||||
Exercisable
at December 31, 2009
|
1,389,667 | $ | 0.30 | $ | — | 6.5 |
Aggregate
intrinsic value is calculated by multiplying the excess of the closing market
price of $0.05 at December 31, 2009 and 2008 over the exercise price by the
number of “in-the money” options outstanding.
Share-based
compensation expense related to options included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations for the years ended December 31, 2009 and 2008 was $181,838 and
$367,739, respectively.
The fair
value of the options granted during fiscal 2008 was $21 thousand and is included
as part of additional paid-in capital as vested. As of December 31, 2009, the
Company had $41 thousand of total unrecognized option compensation costs, which
will be recognized over a weighted average period of 0.9 years.
F-25
The
following summarizes the stock options outstanding and exercisable at December
31, 2009.
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||
Options
|
Weighted
Average
Exercise
|
Weighted Average
Remaining
Contractual
|
Options
|
Weighted
Average
Exercise
|
||||||||||||||
Exercise Price
|
Outstanding
|
Price
|
Life
|
Exercisable
|
Price
|
|||||||||||||
$ |
0.30
|
1,427,000 | $ | 0.30 |
6.0
– 7.6 years
|
1,351,334 | $ | 0.30 | ||||||||||
$ |
0.20
|
115,000 | $ | 0.20 |
8.8 years
|
38,333 | $ | 0.20 | ||||||||||
1,542,000 | $ | 0.29 |
6.6 years
|
1,389,667 | $ | 0.30 |
Weighted Average
|
||||||||
Number of
|
Average Grant
|
|||||||
Options
|
Date Fair Value
|
|||||||
Nonvested
stock options at December 31, 2008
|
496,333 | $ | 0.82 | |||||
Options
granted
|
— | $ | — | |||||
Vested
during period
|
(330,667 | ) | $ | 1.02 | ||||
Options
canceled and expired
|
(13,333 | ) | $ | 0.31 | ||||
Nonvested
shares under option at December 31, 2009
|
152,333 | $ | 0.44 |
Restricted
Common Stock
On May 3,
2007, the Board of Directors of the Company granted restricted shares of common
stock, par value $0.01 per share, to certain individuals. The restricted shares
will vest on January 2, 2012 and have no interim vesting periods. On October 21,
2008, the Board of Directors of the Company granted restricted shares of common
stock, par value $0.01 per share, to certain individuals. The restricted shares
will vest on January 2, 2013 and have no interim vesting periods. During the
quarter ended June 30, 2009, 300,000 shares of restricted stock vested due to
the resignation of two members of the Company’s Board of Directors and the
vesting was accelerated and the remaining compensation expense was recognized as
of that date. The restricted shares were issued from the Plan with the intent of
providing a longer-term employment retention mechanism to key management and
board members.
The
following table summarizes the Company's restricted common stock
activity.
Weighted
|
||||||||||||||||
Weighted
|
Average
|
|||||||||||||||
Number of
|
Average
|
Remaining
|
||||||||||||||
Restricted
|
Aggregate
|
Vesting
|
Vesting
|
|||||||||||||
Common Stock
|
Fair Value
|
Periods
|
Periods
|
|||||||||||||
(in
years)
|
(in
years)
|
|||||||||||||||
Outstanding
at January 1, 2008
|
1,400,000 | $ | 1,120,000 | 4.7 | 4.0 | |||||||||||
Granted
|
1,525,000 | 305,000 | ||||||||||||||
Outstanding
at December 31, 2008
|
2,925,000 | $ | 1,425,000 | 4.4 | 3.3 | |||||||||||
Granted
|
— | — | ||||||||||||||
Vested
|
(300,000 | ) | 180,000 | |||||||||||||
Outstanding
at December 31, 2009
|
2,625,000 | $ | 1,245,000 | 4.4 | 2.3 |
Share-based
compensation expense for the restricted stock was included in selling, general
and administrative expenses in the accompanying consolidated statements of
operations. The compensation expense recognized for the years ended December 31,
2009 and 2008 was $395,584 and $254,139, respectively.
F-26
The total
fair value of the restricted stock granted in fiscal 2008 was $0.3 million
calculated by multiplying the number of shares of restricted common stock
granted and the closing market price of $0.20 on October 21, 2008 and will be
included as part of additional paid-in capital over the vesting period. As of
December 31, 2009, the unrecognized compensation costs related to the remaining
nonvested restricted stock was $0.6 million, which will be recognized over a
weighted average period of 2.3 years.
Shares
Reserved for Future Issuance
At
December 31, 2009, future issuances of the Company’s common stock are as
follows:
Exercise
of Class A and B warrants (1)
|
148,664,852 | |||
Exercise
of common stock purchased warrants (1)
|
1,602,565 | |||
Exercise
of common stock purchased warrants
|
232,733 | |||
Exercise
of stock options
|
1,542,000 | |||
152,042,150 |
(1) On
February 27, 2009, the Company entered into a Preferred Stock Purchase
Agreement. In accordance with the Preferred Stock Purchase Agreement, the
Company intends to seek shareholder approval of a Plan and Agreement of Merger
to reincorporate the Company into the
State of Nevada (the “Reincorporation”). It is contemplated that Paradigm Nevada
will have 250 million authorized shares of common stock. The Company’s
Articles of Incorporation currently authorize the issuance of 50,000,000 shares
of common stock. Until the number of shares of common stock authorized for
issuance is increased, the number of shares of common stock for which the
Warrants are exercisable is limited to 2,700,888 shares. Following the increase
in the number of authorized shares in connection with the Reincorporation, the
Warrants will be fully exercisable.
Since the
Company does not have sufficient authorized shares to settle the above potential
commitments, per guidance in ASC 815 “Derivatives and Hedging”, the Company is
required to reassess the classification of each contract at each balance sheet
date. To determine which contracts shall be reclassified, the Company used the
method of reclassification of contracts with the latest inception or maturity
date first. The Company’s contracts with the latest inception date are Class A
and B warrants and warrants issued to the placement agent, which had been
treated as liabilities, therefore, no reclassification was required at December
31, 2009.
15.
STOCKHOLDERS EQUITY
Series
A Preferred Stock
On July
25, 2007, the Company completed a private placement led by members of the
Company's senior management and Board of Directors for gross proceeds of $1.8
million. The Company issued 1,800 shares of convertible preferred stock (“Series
A Preferred Stock”) with par value of $0.01 per share, which bore an annual
dividend of 10% and were convertible into 1.5 million shares of the Company's
common stock at an average of $1.20 per common share. The private placement
included 5-year warrants to purchase approximately 149,400 shares of common
stock at $1.20 per share. Proceeds from this offering were used for general
working capital and acquisition financing. The investors included certain of the
officers and directors of the Company.
In
connection with the private placement on February 27, 2009, the Company
exchanged 1,700 shares of the Company’s outstanding Series A Preferred Stock for
an aggregate of approximately 21.8 million shares of common stock and
repurchased 100 shares of Series A Preferred Stock for a cash payment to certain
shareholders of an aggregate of approximately $107,000, excluding approximately
$4,000 of dividends.
Warrants
In
connection with the Series A Preferred Stock issuance on July 25, 2007, the
Company issued the purchasers of the Series A Preferred Stock 5-year warrants to
purchase an aggregate of approximately 149,400 shares of common stock at $1.20
per share. The Company also issued warrants to the placement agent to purchase
83,333 common shares of the Company at $1.20 per share. The warrants were
classified as equity in accordance with ASC 815-40 primarily because such
warrants do not provide for net cash settlement. Warrants issued were valued at
$139 thousand, using the Black Scholes model, and recorded as part of additional
paid-in capital using the Black Scholes model.
F-27
16.
CONTRACT STATUS
PROVISIONAL
INDIRECT COST RATES
Billings
under cost-type government contracts are calculated using provisional rates
which permit recovery of indirect costs. These rates are subject to audit on an
annual basis by governmental audit agencies. The cost audits will result in the
negotiation and determination of the final indirect cost rates which the Company
may use for the period(s) audited. The final rates, if different from the
provisionals, may create an additional receivable or liability.
As of
December 31, 2009, the Company has had no final settlements on indirect rates.
The Company periodically reviews its cost estimates and experience rates and
adjustments, if needed, are made and reflected in the period in which the
estimates are revised. In the opinion of management, redetermination of any
cost-based contracts for the open years will not have any material effect on the
Company’s financial position or results of operations.
The
Company has authorized but uncompleted contracts on which work is in progress at
December 31, 2009 approximate, as follows:
Total
contract prices of initial contract awards, including exercised options
and approved change orders (modifications)
|
$ | 130,615,251 | ||
Completed
to date
|
112,954,709 | |||
Authorized
backlog
|
$ | 17,660,542 |
In
addition, the foregoing contracts contain unfunded and unexercised options not
reflected in the above amounts of approximately $59,500,000.
Approximately
9% of the Company’s existing contracts are subject to renegotiation in 2010. The
revenue amount subject to renegotiation is approximately $2.9 million based on
the 2009 revenue attributable to those contracts.
17.
LITIGATION AND CLAIMS
The
Company, from time to time, is a party to litigation and legal proceedings that
it believes to be a part of the ordinary course of business. While it cannot
predict the ultimate outcome of these matters, the Company currently believes
that any ultimate liability arising out of these proceedings will not have a
material adverse effect on its financial position.
During
the year ended December 31, 2008, a former employee of the Company filed a claim
with Maryland Department of Labor claiming that the Company owes him $0.1
million as a severance payment pursuant to an employment agreement with the
Company. The Company filed an opposition; however, the Maryland Department of
Labor and the Office of the Attorney General ruled on November 7, 2008 and
February 26, 2009, respectively, that the claim is valid and should be paid. The
Company agreed to pay such employee an aggregate of approximately $92,000 in
three equal installments and paid all three installments in early
2009.
On April
8, 2009, Samuel Caldwell and Zulema Caldwell, former owners of Caldwell
Technology Solutions, LLC (“CTS”), initiated an action against the
Company in Montgomery County Circuit Court, Maryland, alleging claims arising
out of the Company’s purchase of CTS in July 2007. Specifically, the complaint
alleges that the Company breached the Purchase Agreement dated June 6, 2007
among the Company, CTS and Mr. and Mrs. Caldwell (the “Purchase Agreement”) by
failing to pay “earn-out” compensation pursuant to the terms of the Purchase
Agreement. The complaint alleges that if certain revenue and profits metrics had
been met by CTS in the first 12 months following its acquisition by the Company,
Mr. and Mrs. Caldwell would have been entitled to receive the maximum earn-out
compensation of $2,540,000 (which the Purchase Agreement provides was payable in
cash and shares of the Company’s common stock) under the Purchase Agreement as
opposed to the $165,000 in cash and $254,000 in shares of the Company’s common
stock paid to Mr. and Mrs. Caldwell by the Company. The complaint further
alleges that such metrics were met or would have been met had it not been for
interference by the Company and non-GAAP-based accounting on the part of the
Company.
F-28
In
addition to the breach of contract claim, the complaint also includes (i) a
claim of fraud, based on the allegation that the Company made misrepresentations
when it entered into the Purchase Agreement regarding the accounting that would
determine payment of the earn-out; (ii) a request for a legal “accounting” of
the Company’s books; (iii) a request for pre-judgment attachment of the
Company’s assets in the State of Maryland and (iv) a request that the court
issue a declaratory judgment invalidating a non-competition agreement entered
into by Mr. Caldwell as part of the CTS transaction. In addition to the alleged
contract damages of $2,540,000 (less amounts previously paid to Mr. and Mrs.
Caldwell as earn-out compensation), under their fraud claim, Mr. and Mrs.
Caldwell seek $6,000,000 in punitive damages.
The
Company has filed its answer and a counter-claim for breach of contract and
fraud for undisclosed IRS liabilities, accounts receivable, disclosure of
proprietary information, conversion of IRS checks and corporate credit cards,
and unjust enrichment relating to certain payments made by the Company on behalf
of the plaintiffs, in amounts to be determined at trial. Plaintiffs answer to
the Company’s counterclaim was filed in early October. A schedule has been set
by the court with a deadline for completing discovery of April 30, 2010;
however, the parties recently filed a joint motion seeking for an extension of
the discovery period to July 31, 2010. The Company intends to vigorously defend
the allegations in the complaint and pursue its counter-claims; however, it is
difficult to predict the final outcome of the respective claims of the
parties.
18.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events that have occurred through the date of
financial statement issuance and there are no reportable subsequent
events.
F-29
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PARADIGM
HOLDINGS, INC.,
a
Wyoming corporation
|
||
Date:
March 30, 2010
|
||
By:
|
/s/ Peter B.
LaMontagne
|
|
Peter
B. LaMontagne
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
March 30, 2010
By:
|
/s/ Peter B.
LaMontagne
|
|
Peter
B. LaMontagne
President,
Chief Executive Officer (Principal
Executive
Officer) and Director
|
||
Date:
March 30, 2010
|
By:
|
/s/ Richard Sawchak
|
Richard
Sawchak
Senior
Vice President and Chief Financial Officer
(Principal
Financial and Accounting
Officer)
|
Date:
March 30, 2010
|
By:
|
/s/ Raymond A.
Huger
|
Raymond
A. Huger
Chairman
of the Board of
Directors
|
Date:
March 30, 2010
By:
|
/s/ Martin M. Hale,
Jr.
|
|
Martin
M. Hale, Jr.
Director
|
Date:
March 30, 2010
By:
|
/s/ John A. Moore
|
|
John
A. Moore
Director
|
48
EXHIBIT
INDEX
EXHIBIT NO.
|
DESCRIPTION
|
LOCATION
|
||
3.1
|
Article
of Incorporation, as amended
|
Incorporated
by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the Commission on March
31, 2009
|
||
3.2
|
By-laws,
as amended
|
Incorporated
by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the Commission on March
31, 2009
|
||
4.1
|
Form
of Class A Warrant
|
Incorporated
by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K
as filed with the Commission on March 3, 3009
|
||
4.2
|
Form
of Class B Warrant
|
Incorporated
by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K
as filed with the Commission on March 3, 3009
|
||
4.3
|
Class
A-1 Warrant dated February 27, 2009 issued to Noble International
Investments, Inc. by Paradigm Holdings, Inc.
|
Incorporated
by reference to Exhibit 4.3 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the Commission on March
31, 2009
|
||
10.1
|
Loan
Agreement, dated March 13, 2007, entered into between Paradigm Holdings,
Inc. and Silicon Valley Bank, effective on March 13, 2007
|
Incorporated
by reference to Exhibits 10.1 and 10.2 of the Registrant’s Current Report
on Form 8-K as filed with the Commission on March 19,
2007
|
||
10.2
|
First
Loan Modification Agreement, dated August 11, 2008, between Paradigm
Holdings, Inc. and Silicon Valley Bank
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2008 filed with the Commission on August 13,
2008
|
||
10.3
|
Amendment
No. 1 to Secured Promissory Note effective as of October 31, 2008 between
Paradigm Holdings, Inc. and Theresa Kleszewski
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2008 filed with the Commission on November 14,
2008
|
||
10.4
|
Preferred
Stock Purchase Agreement dated February 27, 2009 among Paradigm Holdings,
Inc., Hale Capital Partners, LP and the other purchasers identified on the
signature pages thereto
|
Incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on Form
8-K as filed with the Commission on March 3, 2009
|
||
10.5
|
Side
Letter dated February 27, 2009 between Hale Capital Partners, LP and EREF
PARA, LLC and accepted and agreed to by Paradigm Holdings,
Inc.
|
Incorporated
by reference to Exhibit 10.2 of the Registrant's Current Report on Form
8-K as filed with the Commission on March 3, 2009
|
||
10.6
|
Preferred
Stock Exchange Agreement dated February 27, 2009 among Paradigm Holdings,
Inc. and the persons listed on Schedule I thereto
|
Incorporated
by reference to Exhibit 10.3 of the Registrant's Current Report on Form
8-K as filed with the Commission on March 3, 2009
|
||
10.7
|
Preferred
Stock Redemption Agreement dated February 27, 2009 among Paradigm
Holdings, Inc., Semper Finance, Inc. and USA Asset Acquisition
Corp.
|
Incorporated
by reference to Exhibit 10.4 of the Registrant's Current Report on Form
8-K as filed with the Commission on March 3,
2009
|
49
EXHIBIT NO.
|
DESCRIPTION
|
LOCATION
|
||
10.8
|
Second
Loan Modification Agreement, dated March 18, 2009, among Silicon Valley
Bank , Paradigm Holdings, Inc., Paradigm Solutions Corporation, Caldwell
Technology Solutions, LLC and Trinity Information Management
Services
|
Incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on Form
8-K as filed with the Commission on March 24, 2009
|
||
10.9
|
Waiver
Agreement, dated 2009, among Silicon Valley Bank , Paradigm Holdings,
Inc., Paradigm Solutions Corporation, Caldwell Technology Solutions, LLC
and Trinity Information Management Services
|
Incorporated
by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2009
|
||
10.10
|
Third
Loan Modification Agreement, dated March 18, 2009, among Silicon Valley
Bank , Paradigm Holdings, Inc., Paradigm Solutions Corporation, Caldwell
Technology Solutions, LLC and Trinity Information Management
Services
|
Incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on Form
8-K as filed with the Commission on May 8, 2009
|
||
10.11
|
Fourth
Loan Modification Agreement, dated July 2, 2009, among Silicon Valley Bank
, Paradigm Holdings, Inc., Paradigm Solutions Corporation, Caldwell
Technology Solutions, LLC and Trinity Information Management
Services
|
Incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on Form
8-K as filed with the Commission on July 8, 2009
|
||
14.1
|
Code
of Ethics
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 dated
February 11, 2005
|
||
21.1
|
Subsidiaries
of Registrant
|
Provided
herewith
|
||
23.1
|
Consent
of Grant Thornton LLP
|
Provided
herewith
|
||
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Provided
herewith
|
||
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Provided
herewith
|
||
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Provided
herewith
|
||
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Provided
herewith
|
50