Attached files
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EX-32.2 - EX-32.2 - COVER ALL TECHNOLOGIES INC | d30733_ex32-2.htm |
EX-31.2 - EX-31.2 - COVER ALL TECHNOLOGIES INC | d30733_ex31-2.htm |
EX-31.1 - EX-31.1 - COVER ALL TECHNOLOGIES INC | d30733_ex31-1.htm |
EX-32.1 - EX-32.1 - COVER ALL TECHNOLOGIES INC | d30733_ex32-1.htm |
EXCEL - IDEA: XBRL DOCUMENT - COVER ALL TECHNOLOGIES INC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30,
2013
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to
____________________
Commission file number: 1-09228
COVER-ALL TECHNOLOGIES INC.
(Exact Name of Registrant as Specified in Its Charter)
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
13-2698053 |
||||||
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
||||||
412 Mt. Kemble Avenue, Suite 110C, Morristown, New Jersey |
07960 |
||||||
(Address of principal executive offices) |
(Zip code) |
||||||
973-461-5200 (Registrants telephone number, including area code) |
|||||||
None (Former name, former address and former fiscal year, if changed since last report) |
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 Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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 [ ] No [X]
Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at October 28, 2013 |
|||||||||
Common Stock, $.01 par value per share |
26,319,707 shares |
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013 |
PART I: |
FINANCIAL INFORMATION |
||||||||||
Item 1. |
Financial Statements |
||||||||||
Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012 |
3 |
||||||||||
Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (Unaudited) |
5 |
||||||||||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited) |
6 |
||||||||||
Notes to Consolidated Financial Statements (Unaudited) |
8 |
||||||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
15 |
|||||||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
25 |
|||||||||
Item 4. |
Controls and Procedures |
25 |
|||||||||
PART II: |
OTHER INFORMATION |
||||||||||
Item 1A. |
Risk Factors |
26 |
|||||||||
Item 6. |
Exhibits |
26 |
|||||||||
SIGNATURES |
27 |
2
PART I: FINANCIAL
INFORMATION
Item 1. Financial
Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
CONSOLIDATED BALANCE SHEETS |
September 30, 2013 |
December 31, 2012 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Unaudited) | ||||||||||
Assets: |
||||||||||
Current Assets: |
||||||||||
Cash and Cash Equivalents |
$ | 1,499,869 | $ | 1,353,892 | ||||||
Accounts Receivable (Less Allowance for Doubtful Accounts of $25,000) |
2,503,354 | 2,365,750 | ||||||||
Prepaid Expenses |
635,588 | 528,398 | ||||||||
Deferred Tax Asset |
910,998 | 910,998 | ||||||||
Total Current Assets |
5,549,809 | 5,159,038 | ||||||||
Property and Equipment Net |
760,624 | 922,881 | ||||||||
Goodwill |
1,039,114 | 1,039,114 | ||||||||
Capitalized Software (Less Accumulated Amortization of $21,118,531 and $17,658,748 in 2013 and 2012, Respectively) |
8,785,608 | 10,441,992 | ||||||||
Customer Lists/Relationship (Less Accumulated Amortization of $326,167 and $260,093 in 2013 and 2012, Respectively) |
75,834 | 141,907 | ||||||||
Deferred Tax Asset |
2,614,430 | 2,614,430 | ||||||||
Deferred Financing Costs (Net of Amortization of $28,716 and $7,870 in 2013 and 2012, Respectively) |
63,567 | 84,413 | ||||||||
Other Assets |
255,110 | 362,806 | ||||||||
Total Assets |
$ | 19,144,096 | $ | 20,766,581 |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
CONSOLIDATED BALANCE SHEETS |
September 30, 2013 |
December 31, 2012 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Unaudited) | ||||||||||
Liabilities and Stockholders Equity: |
||||||||||
Current Liabilities: |
||||||||||
Accounts Payable |
$ | 1,128,194 | $ | 1,681,007 | ||||||
Accrued Expenses |
658,152 | 1,390,533 | ||||||||
Accrued Income Taxes |
16,159 | | ||||||||
Deferred Charges |
239,513 | 83,455 | ||||||||
Current Portion of Capital Lease |
113,430 | 109,878 | ||||||||
Unearned Revenue |
2,710,243 | 2,426,810 | ||||||||
Total Current Liabilities |
4,865,691 | 5,691,683 | ||||||||
Long-Term Liabilities: |
||||||||||
Long-Term Debt |
1,591,810 | 1,457,945 | ||||||||
Long-Term Portion of Capital Lease |
382,257 | 476,664 | ||||||||
Total Long-Term Liabilities |
1,974,067 | 1,934,609 | ||||||||
Total Liabilities |
6,839,758 | 7,626,292 | ||||||||
Commitments and Contingencies |
| | ||||||||
Stockholders Equity: Common Stock, $.01 Par Value, Authorized 75,000,000 Shares; 26,319,707 and 25,936,106 Shares Issued and Outstanding in 2013 and 2012, Respectively |
263,197 | 259,361 | ||||||||
Additional Paid-In Capital |
32,524,205 | 32,003,909 | ||||||||
Accumulated Deficit |
(20,483,064 | ) | (19,122,981 | ) | ||||||
Total Stockholders Equity |
12,304,338 | 13,140,289 | ||||||||
Total Liabilities and Stockholders Equity |
$ | 19,144,096 | $ | 20,766,581 |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
2012 |
2013 |
2012 |
||||||||||||||||
Revenues: |
|||||||||||||||||||
Licenses |
$ | 1,028,474 | $ | 237,995 | $ | 5,348,322 | $ | 2,663,993 | |||||||||||
Support Services |
2,002,028 | 2,167,994 | 6,006,206 | 6,449,353 | |||||||||||||||
Professional Services |
2,028,602 | 863,734 | 4,593,917 | 3,146,817 | |||||||||||||||
Total Revenues |
5,059,104 | 3,269,723 | 15,948,445 | 12,260,163 | |||||||||||||||
Cost of Revenues: |
|||||||||||||||||||
Licenses |
1,203,966 | 1,028,347 | 3,527,090 | 3,203,881 | |||||||||||||||
Support Services |
1,565,818 | 1,341,269 | 5,879,782 | 4,388,977 | |||||||||||||||
Professional Services |
883,174 | 1,115,018 | 2,325,940 | 3,681,185 | |||||||||||||||
Total Cost of Revenues |
3,652,958 | 3,484,634 | 11,732,812 | 11,274,043 | |||||||||||||||
Direct Margin |
1,406,146 | (214,911 | ) | 4,215,633 | 986,120 | ||||||||||||||
Operating Expenses: |
|||||||||||||||||||
Sales and Marketing |
600,629 | 703,132 | 1,774,300 | 2,051,716 | |||||||||||||||
General and Administrative |
492,364 | 391,652 | 1,558,325 | 1,262,775 | |||||||||||||||
Acquisition Costs |
| | | 136,957 | |||||||||||||||
Reorganization Costs |
319,014 | | 319,014 | | |||||||||||||||
Research and Development |
807,586 | 177,772 | 1,633,611 | 537,278 | |||||||||||||||
Total Operating Expenses |
2,219,863 | 1,272,556 | 5,285,250 | 3,988,726 | |||||||||||||||
Operating (Loss) Income |
(813,717 | ) | (1,487,467 | ) | (1,069,617 | ) | (3,002,606 | ) | |||||||||||
Other Expense (Income): |
|||||||||||||||||||
Interest Expense |
92,397 | 27,925 | 275,820 | 27,925 | |||||||||||||||
Interest Income |
| | | (37 | ) | ||||||||||||||
Other Income |
| | (3,821 | ) | (14,539 | ) | |||||||||||||
Total Other Expense (Income) |
92,397 | 27,925 | 271,999 | 13,349 | |||||||||||||||
(Loss) Income Before Income Taxes |
(906,114 | ) | (1,515,392 | ) | (1,341,616 | ) | (3,015,955 | ) | |||||||||||
Income Taxes |
10,295 | | 18,466 | | |||||||||||||||
Net (Loss) Income |
$ | (916,409 | ) | $ | (1,515,392 | ) | $ | (1,360,082 | ) | $ | (3,015,955 | ) | |||||||
Basic (Loss) Earnings Per Common Share |
$ | (0.03 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.12 | ) | |||||||
Diluted (Loss) Earnings Per Common Share |
$ | (0.03 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.12 | ) | |||||||
Weighted Average Number of Common Shares Outstanding for Basic Earnings Per Common Share |
26,286,000 | 25,863,000 | 26,114,000 | 25,860,000 | |||||||||||||||
Weighted Average Number of Common Shares Outstanding for Diluted Earnings Per Common Share |
26,286,000 | 25,863,000 | 26,114,000 | 25,860,000 |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
Nine months ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
2012 |
||||||||||
Cash Flows Provided From Operating Activities: |
|||||||||||
Net (Loss) Income |
$ | (1,360,082 | ) | $ | (3,015,955 | ) | |||||
Adjustments to Reconcile Net (Loss) Income to |
|||||||||||
Net Cash Provided From Operating Activities: |
|||||||||||
Depreciation |
188,635 | 123,200 | |||||||||
Amortization of Capitalized Software |
3,459,783 | 2,523,765 | |||||||||
Amortization of Customer Lists/Relationships |
66,074 | 100,500 | |||||||||
Amortization of Non-Compete Agreements |
| 48,000 | |||||||||
Amortization of Stock-Based Compensation |
539,129 | 425,119 | |||||||||
Amortization of Deferred Financing Costs |
20,846 | 2,361 | |||||||||
Stock Based Compensation Provided for Services |
76,366 | 60,902 | |||||||||
Capital Lease Interest Payments |
| (1,791 | ) | ||||||||
Changes in Assets and Liabilities: |
|||||||||||
(Increase) Decrease in: |
|||||||||||
Accounts Receivable |
(137,604 | ) | (423,819 | ) | |||||||
Prepaid Expenses |
(107,190 | ) | (301,257 | ) | |||||||
Other Assets |
107,696 | (145,790 | ) | ||||||||
Increase (Decrease) in: |
|||||||||||
Accounts Payable |
(552,813 | ) | 1,196,197 | ||||||||
Accrued Liabilities |
(732,382 | ) | (158,749 | ) | |||||||
Taxes Payable |
16,159 | | |||||||||
Deferred Charges |
156,058 | (39,409 | ) | ||||||||
Unearned Revenue |
283,433 | (95,982 | ) | ||||||||
Net Cash Provided From Operating Activities |
2,024,108 | 297,292 | |||||||||
Cash Flows Used For Investing Activities: |
|||||||||||
Capital Expenditures |
(26,378 | ) | (256,709 | ) | |||||||
Capitalized Software Expenditures |
(1,803,399 | ) | (3,785,812 | ) | |||||||
Net Cash Used For Investing Activities |
(1,829,777 | ) | (4,042,521 | ) | |||||||
Cash Flows Provided From (Used For) Financing Activities: |
|||||||||||
Deferred Financing Costs |
| (127,500 | ) | ||||||||
Proceeds from Loan Agreement |
| 2,000,000 | |||||||||
Proceeds from Note Payable |
| 400,000 | |||||||||
Capital Lease Principal Payments |
(90,855 | ) | (30,757 | ) | |||||||
Payment of Debt |
| | |||||||||
Proceeds from Exercise of Stock Options |
42,501 | 21,250 | |||||||||
Net Cash Provided From (Used For) Financing Activities |
(48,354 | ) | 2,262,993 | ||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
145,977 | (1,482,236 | ) | ||||||||
Cash and Cash Equivalents Beginning of Period |
1,353,892 | 3,281,965 | |||||||||
Cash and Cash Equivalents End of Period |
$ | 1,499,869 | $ | 1,799,729 |
6
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
Supplemental Disclosures of Cash Flow Information |
||||||||||
Cash Paid During the Periods for: |
||||||||||
Interest |
$ | 141,955 | $ | 10,368 | ||||||
Income Taxes |
$ | | $ | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
7
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
[1] Description of Business
Cover-All Technologies Inc.,
through its wholly-owned subsidiary, Cover-All Systems, Inc. (collectively, the Company), licenses and maintains its software products for
the property/casualty insurance industry throughout the United States and Puerto Rico. The subsidiary also provides professional consulting services to
its customers interested in customizing their software.
[2] Basis of Presentation
The consolidated balance sheet as
of December 31, 2012, has been derived from audited financial statements, and the unaudited interim financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have
been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the
information not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Companys latest shareholders annual report on Form 10-K filed with the SEC on March 29,
2013 for the fiscal year ended December 31, 2012 (Form 10-K).
In the opinion of management, all
adjustments (which include normal and recurring nature adjustments) necessary to present a fair statement of the Companys financial position as
of September 30, 2013, and results of operations for the three and nine month periods ended September 30, 2013 and 2012 and the cash flows for the nine
month periods ended September 30, 2013 and 2012, as applicable, have been made.
The results of operations for the
three and nine month periods ended September 30, 2013 and 2012 are not necessarily indicative of the operating results for the full fiscal year or any
future periods.
[3] Capitalized Software Development
Costs
Costs for the conceptual
formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological
feasibility has been established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available
for general release to customers. Costs associated with product enhancements that extend the original products life or significantly improve the
original products marketability are also capitalized once technological feasibility has been established. Amortization is calculated on a
product-by-product basis using the straight-line method over the remaining economic life of the product. The Company capitalized software development
costs of approximately $373,000 and $1,803,000, respectively, in the three and nine months ended September 30, 2013 compared to approximately
$1,107,000 and $3,786,000, respectively, in the same periods in 2012. Amortization of capitalized software development costs was approximately
$1,187,000 and $3,460,000, respectively, in the three and nine months ended September 30, 2013 compared to approximately $1,003,000 and 2,524,000,
respectively, in the same periods in 2012.
[4] Earnings Per Share
In the three and nine months
ended September 30, 2013, common stock equivalents representing 3,434,520 shares of common stock were excluded from weighted average shares outstanding
for diluted income per common share purposes because the effect would be anti-dilutive. In the three months ended September 30, 2012, common stock
equivalents representing 4,002,839 shares of common stock were excluded from weighted average shares outstanding for diluted income per common share
purposes because the effect would be anti-dilutive. In the nine months ended September 30, 2012, diluted loss per common share is identical to basic
loss per common share as the Company is in a net loss position and the impact of including common stock equivalents is anti-dilutive.
8
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
[5] Stock-Based Compensation and Stock Purchase
Plans
Stock Options
In the three and nine months
ended September 30, 2013, we recognized approximately $184,000 and $615,000, respectively, of stock-based compensation expense in our consolidated
financial statements.
Options and stock awards for the
purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees and consultants at an exercise or grant price determined
by the Board of Directors on the date of grant. Options may be granted as incentive or nonqualified stock options with a term of not more than ten
years. The 2005 Stock Incentive Plan (as amended in 2006 and in 2008) allows the Board of Directors to grant restricted or unrestricted stock awards or
awards denominated in stock equivalent units, securities or debentures convertible into common stock, or any combination of the foregoing and may be
paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash. At September 30, 2013, an
aggregate of 1,834,442 shares were available for grant under the 2005 Stock Incentive Plan.
The Company uses the
Black-Scholes-Merton option pricing model (Black-Scholes) to measure fair value of the share-based awards. The Black-Scholes model requires
us to make significant judgments regarding the assumptions used within the model, the most significant of which are the expected stock price
volatility, the expected life of the option award, the risk-free interest rate of return and dividends during the expected term.
- Expected volatilities are based on historical volatility
of the Companys stock during the preceding periods.
- The Company uses historical data to estimate the expected
life of option awards. The expected term of options granted represents the period of time that options granted are expected to be
outstanding.
- The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yields for an equivalent term at the time of grant.
- The Company does not anticipate issuance of dividends
during the expected term.
2013 |
2012 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected volatility |
45%50 | % | 41%50 | % | ||||||
Weighted-average volatility |
41 | % | 41 | % | ||||||
Expected dividends |
0 | % | 0 | % | ||||||
Expected term (in years) |
35 | 35 | ||||||||
Risk-free interest rate |
0.46 | % | 0.46 | % |
As of September 30, 2013, there
was approximately $264,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements previously granted by
the Company. That cost is expected to be recognized over a weighted-average period of 0.6 years.
9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
A summary of the changes in our
outstanding common stock options for all outstanding plans for the nine months ended September 30, 2013 is as follows:
Shares |
Exercise Price Per Share |
Weighted-Average Remaining Contractual Life |
Weighted-Average Exercise Price |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, January 1, 2013 |
2,104,963 | $ | 0.851.67 | 2.8 years | $ | 1.40 | ||||||||||||
Exercised |
(250,000 | ) | 0.85 | | 0.85 | |||||||||||||
Expired |
(72,463 | ) | 1.38 | | 1.38 | |||||||||||||
Cancelled |
(5,000 | ) | 1.55 | | 1.55 | |||||||||||||
Balance, September 30, 2013 |
1,777,500 | $ | 1.001.67 | 2.5 years | $ | 1.48 |
Of the stock options outstanding
at September 30, 2013, an aggregate of 983,500 are currently exercisable.
The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our
employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of our employee stock options.
Warrants
As of September 30, 2013, there
were 1,442,000 warrants outstanding. A summary of the changes in outstanding warrants is as follows:
Outstanding and Exercisable Warrants |
Exercise Price Per Warrant |
Weighted-Average Remaining Contractual Life |
Weighted-Average Exercise Price |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, January 1, 2013 |
1,442,000 | $ | 1.48 | 4.7 | $ | 1.48 | ||||||||||||
Balance, September 30, 2013 |
1,442,000 | $ | 1.48 | 4.0 | $ | 1.48 |
10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Time-Based Restricted Stock Units
A summary of the changes in our
time-based restricted stock units, or RSUs, for the nine months ended September 30, 2013 is as follows:
Shares |
Weighted-Average Grant Date Fair Value Per Share |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance, January 1, 2013 |
402,500 | $ | 1.61 | |||||||
Granted |
82,520 | 1.23 | ||||||||
Cancelled |
(10,000 | ) | 1.55 | |||||||
Vested |
(260,000 | ) | 1.64 | |||||||
Balance, September 30, 2013 |
215,020 | $ | 1.49 |
We follow Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 718, Accounting for Stock Options and Other Stock-Based
Compensation. Among other items, ASC 718 requires companies to record compensation expense for shared-based awards issued to employees and
directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant
dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. For restricted
stock awards, the calculation of compensation expense under ASC 718 is based on the intrinsic value of the grant.
[6] Income Taxes
The deferred tax asset from tax
net operating loss carryforwards of approximately $5,879,000 represents approximately $12,000,000 of net operating loss carryforwards which are subject
to expiration beginning in 2023. During the nine months ended September 30, 2013, the deferred tax asset valuation allowance was decreased for the
assumed utilization of prior period net operating loss carryforwards utilized to offset taxable income for the current period, subject to federal
alternative minimum tax limitations. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction,
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect
the Companys ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following:
increased competition, a decline in sales or margins, a loss of market share, and a decrease in demand for professional services. Based upon the levels
of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, at September 30,
2013, management believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of
these deferred tax assets in the future.
The Tax Reform Act of 1986
enacted a complex set of rules which limits a companys ability to utilize net operating loss carryforwards and tax credit carryforwards in
periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a
defined testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, and the conversion of
outstanding warrants, or the result of other changes in ownership of our outstanding stock, the Company may experience an ownership change and
consequently out utilization of net operating loss carryforwards could be significantly limited.
11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
[7] Recently Issued Accounting
Standards
In February 2013, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, which supersedes and replaces the
presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. The amendment requires that
an entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net
income if the amount being reclassified is required under U.S. GAAP. For other amounts that are not required under U.S. GAAP to be reclassified in
their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that
provide additional detail about those amounts. ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning on or
after December 15, 2012. We adopted the amended standards beginning January 1, 2013. As there was no other comprehensive income during the nine months
ended September 30, 2013 or 2012 or the years ended December 31, 2012 or 2011, or any amounts reclassified out of accumulated other comprehensive
income, there was no impact on our financial position, results of operations, or cash flows.
In March 2013, the FASB issued
ASU 2013-04, which provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability
arrangements for which the total amount of the obligation is fixed at the reporting date. The update requires an entity to measure obligations
resulting from joint and several liability obligations for which the total amount of the obligation within the scope of the update is fixed at the
reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and any additional
amount the reporting entity expects to pay on behalf of its co-obligors. The update also requires an entity to disclose the nature and amount of the
obligation as well as other information about those obligations. The amendments in ASU 2013-04 are effective for fiscal years and interim periods
within those years, beginning on or after December 15, 2013 and must be applied retrospectively. We do not expect the adoption of ASU 2013-04 in the
first quarter of 2014 to have an impact on our financial position, results of operations, or cash flows.
We believe there is no additional
new accounting guidance adopted, but not yet effective, that is relevant to the readers of our financial statements. However, there are numerous new
proposals under development which may have a significance impact on the Companys financial reporting, if and when enacted.
[8] Long-Term Debt
On September 11, 2012, the
Company entered into a Loan and Security Agreement (Loan Agreement) between and among Imperium Commercial Finance Master Fund, LP, a
Delaware limited partnership (Imperium), as lender, Cover-All Systems, Inc., a wholly-owned subsidiary of the Company (the
Subsidiary), as borrower, and the Company, as a guarantor. The Loan Agreement provides for a three-year term loan to the Subsidiary of
$2,000,000, evidenced by a Term Note in favor of Imperium, and a three-year revolving credit line to the Subsidiary of up to $250,000, evidenced by a
Revolving Credit Note in favor of Imperium (together with the Term Note, the Imperium Notes). The amount available to be borrowed under the
revolving credit line may not exceed 80% of Eligible Accounts (as defined in the Loan Agreement). All amounts borrowed under the term loan and the
revolving credit line are secured by a security interest in all of the assets of the Subsidiary and guaranteed by the Company, which guarantee is
secured by a pledge by the Company of all of the outstanding shares of capital stock of the Subsidiary. As of September 30, 2013, no balance was
outstanding under the Revolving Credit Line. As of September 30, 2013, the Long-Term Debt balance consists of the following:
Principal Balance Outstanding |
$ | 2,000,000 | ||||
Discount |
(408,190 | ) | ||||
Long-Term Debt |
$ | 1,591,810 |
Interest on the outstanding
principal balance under the Imperium Notes accrues at a fixed rate equal to eight percent (8%) per annum and is payable monthly. The $2,000,000
principal balance and any remaining interest under the Imperium Notes will be immediately due and payable on the earliest of (1) September 10, 2015, or
(2) the
12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
date Imperiums obligation to advance funds under the
revolving credit line is terminated following an event of default pursuant to the terms and conditions of the Loan Agreement. Payments and prepayments
received by Imperium will be applied against principal and interest as provided for in the Loan Agreement.
The Loan Agreement contains customary representations,
warranties, affirmative and negative covenants, and events of default. If an event of default occurs and is continuing, Imperium has certain rights and
remedies under the Loan Agreement. Additionally, the Loan Agreement requires the Company to maintain minimum revenues and earnings before interest,
taxes, depreciation and amortization (EBITDA), tested annually, commencing with the twelve months ending September 30, 2013. As of
September 30, 2013, the Company was in compliance with its minimum revenue and EBITDA covenants under the Loan Agreement.
In connection with the Loan Agreement, the Company issued
to Imperium a five-year warrant (the Stock Purchase Warrant) to purchase 1,400,000 shares of the Companys common stock at an exercise
price of $1.48 per share. The Stock Purchase Warrant is not exercisable until the earliest of (i) the date when Current Market Value (as defined
therein) exceeds the exercise price multiplied by two, (ii) the date of a Change of Control (as defined therein), and (iii) the third anniversary of
the date of issuance of the Stock Purchase Warrant. The Stock Purchase Warrant provides for adjustments to the exercise price and the number of shares
issuable upon exercise in certain events to protect against dilution and for cashless exercise. The Stock Purchase Warrant also required the Company to
file a registration statement with the Securities and Exchange Commission with respect to the shares issuable upon exercise of the Stock Purchase
Warrant within 45 days of the date of issuance of the Stock Purchase Warrant, and that the Company use its best efforts to obtain the effectiveness of
such registration statement within 90 days (subject to extension to 120 days) of the date of issuance of the Stock Purchase Warrant. The Company filed
the Registration Statement and it was effective in the required time frame. If the Company failed to comply with its obligations to file the
registration statement and obtain its effectiveness within the specified periods, and in certain other events, the Company would have been required to
pay Imperium, for each month such failure continued, the amount of $22,500. The Stock Purchase Warrant also provided for piggyback registration rights.
The proceeds from the $2,000,000 Imperium Note were allocated using the relative fair value method, to both the notes payable balance and warrants
issued.
The Company also issued five-year warrants (the
Monarch Warrants) to purchase 42,000 shares, in the aggregate, of the Companys common stock at an exercise price of $1.48 per share,
to Monarch Capital Group, LLC (Monarch), which acted as the Companys financial adviser in connection with the loan transaction, and
an officer of Monarch. The Monarch Warrants are not exercisable until the earliest of (i) the date when the Current Exercise Price (as defined therein)
exceeds the exercise price multiplied by two, (ii) the date of a Change of Control transaction (as defined therein), and (iii) the third anniversary of
the date of issuance. The Monarch Warrants provide for adjustment to the exercise price and the number of shares issuable upon exercise in certain
events to protect against dilution and for cashless exercise. The Monarch Warrants also provided for piggyback registration rights. On April 10, 2013,
the Company amended and restated the terms of the Imperium Warrant and each of the Finders Warrants to provide that the aggregate number of
shares issuable on exercise of the Imperium Warrant and the Finders Warrants shall not exceed 19.9% of the Companys issued and outstanding
shares of common stock at the date of original issuance (i.e., 5,171,145 shares of common stock based on 25,857,730 shares of common stock issued and
outstanding at September 11, 2012) without first obtaining the approval of the Companys stockholders.
In connection with the Imperium Loan Agreement financing,
the Company incurred deferred financing costs of approximately $92,000, which will be amortized over the life of the loan (or earlier if the loan
becomes due or is repaid before its fixed maturity).
[9] Commitments and Contingencies
Sales and Use Tax Audit
In May of 2012, the New York State Department of Taxation and Finance commenced an examination for tax years 2009 through 2012 of state sales and use tax. During the pendency of this audit, the Department of Taxation and Finance extended the period of its examination through February 28, 2013. As of the date of this quarterly report on Form 10-Q, the Department of Taxation and Finance has not issued a formal notice of determination or notice of deficiency in this matter.
13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
[10] Reorganization Costs
During the three months ended
September 30, 2013, the Company recorded reorganization charges aggregating approximately $319,000 which are included in Reorganization
Costs in the consolidated statements of operations for 2013. These reorganization costs consist of severance payments to former employees of the
Company, including the former Chief Executive Officer.
The following table summarizes
the components of the reorganization cost liability during 2013:
Employee Separation Costs |
||||||
---|---|---|---|---|---|---|
Balance, January 1, 2013 |
$ | | ||||
Charges |
319,014 | |||||
Cash Payments |
71,068 | |||||
Balance, September 30, 2013 |
$ | 247,946 |
14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
Item 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Certain of the matters
discussed in this report, including, without limitation, matters discussed under this Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations, may constitute forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act) and are subject to the occurrence of certain risks, uncertainties and contingencies which may not occur in the time frames
anticipated or otherwise, and, as a result, could cause actual results to differ materially from such statements. In addition to other factors and
matters discussed elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission
(SEC) over the last 12 months, including our Annual Report on Form 10-K filed with the SEC on March 29, 2013, these risks, uncertainties
and contingencies include, but are not limited to, risks associated with increased competition, customer decisions, the successful completion of
continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful
addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which
result in sufficient revenues to realize profits, and other business factors beyond our control.
Overview
We are a supplier of software
products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization,
conversion from existing systems and data integration with other software or reporting agencies. We also offer on-going support services including
incorporating recent insurance rate and rule changes in our solutions. These support services also include analyzing the changes, developments, quality
assurance, documentation and distribution of insurance rate and rule changes.
We earn revenue from software
contract licenses, fees for servicing the product, which we call support services, and professional services. Total revenue for the three months ended
September 30, 2013 increased to approximately $5,059,000 from approximately $3,270,000 for the three months ended September 30, 2012, mainly due to an
increase in license and professional services revenues for the three months ended September 30, 2013. Total revenue for the nine months ended September
30, 2013 increased to approximately $15,948,000 from approximately $12,260,000 for the nine months ended September 30, 2012, mainly due to an increase
in license and professional services revenues.
The following is an overview of
the key components of our revenue and other important financial data for the three and nine months ended September 30, 2013:
Software Licenses. Our
license revenue in the three and nine months ended September 30, 2013 of approximately $1,028,000 and $5,348,000, respectively, was from new and
existing customers who chose to renew, add onto or extend their use of our software. For the three and nine months ended September 30, 2012, we
generated approximately $238,000 and $2,664,000, respectively, in license revenue. Our new software license revenue is affected by the strength of
general economic and business conditions and the competitive position of our software products. New software license sales are characterized by long
sales cycles and intense competition. Timing of new software license sales can substantially affect our quarterly results.
Support Services. Support
services revenue was approximately $2,002,000 and $6,006,000, respectively, in the three and nine months ended September 30, 2013 compared to
approximately $2,168,000 and $6,449,000, respectively, in the same periods in 2012. Support services revenue is influenced primarily by the following
factors: the renewal rate from our existing customer base, the amount of new maintenance associated with new license sales and annual price
increases.
Professional Services.
Professional services revenue was approximately $2,029,000 and $4,594,000, respectively, in the three and nine months ended September 30, 2013 compared
to approximately $864,000 and $3,147,000, respectively, in the same periods of 2012, due to increased demand for customizations and implementations of
Cover-All Policy for the three and nine months ended September 30, 2013 compared to the same periods of 2012.
15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
(Loss) Income before Income
Taxes. (Loss) income before income taxes was approximately $(906,000) and $(1,342,000), respectively, in the three and nine months ended September
30, 2013 compared to approximately $(1,515,000) and $(3,016,000), respectively, in the same periods of 2012, primarily due to an increase in license
and professional services revenues and our continuing and ongoing effort to maintain our expenses in line with our revenues for the nine months ended
September 30, 2013.
Net (Loss) Income. Net
(loss) income for the three and nine months ended September 30, 2013 was approximately $(916,000) and $(1,360,000), respectively, compared to
approximately $(1,515,000) and $(3,016,000), respectively, in the same periods of 2012. This was mainly a result of an increase in license and
professional services revenues in the three and nine months ended September 30, 2013.
EBITDA. Earnings before
interest, taxes, depreciation and amortization (EBITDA), a non-GAAP metric, was approximately $456,000 and $2,670,000, respectively, for
the three and nine months ended September 30, 2013 compared to approximately $(393,000) and $(190,000), respectively, for the three and nine months
ended September 30, 2012.
Cash Flow. We generated
approximately $2,024,000 in positive cash flow from operations in the first nine months of 2013 and ended the period with approximately $1,500,000 in
cash and cash equivalents and approximately $2,503,000 in accounts receivable.
We continue to face competition
for growth in 2013 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long
sales cycles and general economic and business conditions. In addition, there are risks related to customers acceptance and implementation
delays, which could affect the timing and amount of license revenue we are able to recognize. However, given the positive response to our new software
from existing customers and the introduction of additional software capabilities, we are enhancing our sales and marketing efforts to both new and
existing customers. Consequently, we are incurring sales and marketing expense in advance of generating the corresponding revenue.
As we shift over time from
software development to deployment, from a financial perspective, the non-cash charges for amortization of developed software will increasingly impact
our bottom line. Therefore, in order to provide more visibility to investors, we have decided to also report EBITDA to show what we believe is the
Companys earnings power without the impact of, among other items, amortization. In the first nine months of 2013, the non-cash charge for
amortization of capitalized software increased more than 37% from the same period in 2012 to approximately $3,460,000, and we expect this amount could
exceed $4 million, or $0.18 per share, in 2013, depending on our sales success. Therefore, we believe that EBITDA will be a useful measure of the true
earnings power of the Company while we complete the development and deployment cycle. As such, we expect to increasingly focus on EBITDA to evaluate
our progress.
USE OF NON-GAAP FINANCIAL MEASURES
In evaluating our business, we
consider and use EBITDA as a supplemental measure of our operating performance. The Company defines EBITDA as earnings before interest, taxes,
depreciation and amortization. The Company presents EBITDA because it believes it is frequently used by securities analysts, investors and other
interested parties as a measure of financial performance.
The term EBITDA is not defined
under U.S. generally accepted accounting principles, or U.S. GAAP, and is not a measure of operating income, operating performance or liquidity
presented in accordance with U.S. GAAP. EBITDA has limitations as an analytical tool, and when assessing the Companys operating performance,
investors should not consider EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in
accordance with U.S. GAAP. Among other things, EBITDA does not reflect the Companys actual cash expenditures. Other companies may calculate
similar measures differently than Cover-All limiting their usefulness as comparative tools. We compensate for these limitations by relying on our U.S.
GAAP results and using EBITDA only supplementally.
16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
The following is an unaudited
reconciliation of U.S. GAAP net income to EBITDA for the three and nine months ended September 30, 2013 and 2012:
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
2012 |
2013 |
2012 |
||||||||||||||||
Net (Loss) Income |
$ | (916,409 | ) | $ | (1,515,392 | ) | $ | (1,360,082 | ) | $ | (3,015,955 | ) | |||||||
Interest (Income) Expense, Net |
92,397 | 27,924 | 275,820 | 27,888 | |||||||||||||||
Income Tax Expense |
10,295 | | 18,466 | | |||||||||||||||
Depreciation |
60,399 | 40,096 | 188,635 | 123,200 | |||||||||||||||
Amortization |
1,208,979 | 1,054,735 | 3,546,704 | 2,674,627 | |||||||||||||||
EBITDA |
$ | 455,661 | $ | (392,637 | ) | $ | 2,669,543 | $ | (190,240 | ) | |||||||||
EBITDA per Common Share: |
|||||||||||||||||||
Basic |
$ | 0.02 | $ | (0.02 | ) | $ | 0.10 | $ | (0.01 | ) | |||||||||
Diluted |
$ | 0.02 | $ | (0.02 | ) | $ | 0.10 | $ | (0.01 | ) |
17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
Results of Operations
The following table sets forth,
for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
2012 |
2013 |
2012 |
||||||||||||||||
Revenues: |
|||||||||||||||||||
License |
20.3 | % | 7.3 | % | 33.5 | % | 21.7 | % | |||||||||||
Support Services |
39.6 | 66.3 | 37.7 | 52.6 | |||||||||||||||
Professional Services |
40.1 | 26.4 | 28.8 | 25.7 | |||||||||||||||
Total Revenues |
100.0 | 100.0 | 100.0 | 100.00 | |||||||||||||||
Cost of Revenues: |
|||||||||||||||||||
License |
23.8 | 31.5 | 22.1 | 26.1 | |||||||||||||||
Support Services |
31.0 | 41.0 | 36.9 | 35.8 | |||||||||||||||
Professional Services |
17.4 | 34.1 | 14.6 | 30.1 | |||||||||||||||
Total Cost of Revenues |
72.2 | 106.6 | 73.6 | 92.0 | |||||||||||||||
Direct Margin |
27.8 | (6.6 | ) | 26.4 | 8.0 | ||||||||||||||
Operating Expenses: |
|||||||||||||||||||
Sales and Marketing |
11.9 | 21.5 | 11.1 | 16.7 | |||||||||||||||
General and Administrative |
9.7 | 11.9 | 9.8 | 10.3 | |||||||||||||||
Acquisition Expenses |
| | | 1.1 | |||||||||||||||
Reorganization Costs |
6.3 | | 2.0 | | |||||||||||||||
Research and Development |
16.0 | 5.4 | 10.2 | 4.4 | |||||||||||||||
Total Operating Expenses |
43.9 | 38.8 | 33.1 | 32.5 | |||||||||||||||
Operating (Loss) Income |
(16.1 | ) | (45.4 | ) | (6.7 | ) | (24.5 | ) | |||||||||||
Other (Expense) Income: |
|||||||||||||||||||
Interest (Expense) Income |
(1.8 | ) | (0.9 | ) | (1.7 | ) | (0.2 | ) | |||||||||||
Other Income |
| | | 0.1 | |||||||||||||||
Total Other (Expense) Income |
(1.8 | ) | (0.9 | ) | (1.7 | ) | (0.1 | ) | |||||||||||
(Loss) Income Before Income Taxes |
(17.9 | ) | (46.3 | ) | (8.4 | ) | (24.6 | ) | |||||||||||
Income Taxes |
0.2 | | 0.1 | | |||||||||||||||
Net (Loss) Income |
(18.1 | )% | (46.3 | )% | (8.5 | )% | (24.6 | )% |
Three and Nine Months Ended
September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012
Total revenues for the three
months ended September 30, 2013 were approximately $5,059,000 compared to approximately $3,270,000 for the same period in 2012. License fees were
approximately $1,028,000 for the three months ended September 30, 2013 compared to approximately $238,000 in the same period in 2012 as a result of
sales to new and existing customers in 2013. For the three months ended September 30, 2013, support services revenue was approximately $2,002,000
compared to approximately $2,168,000 in the same period of the prior year primarily due to annual renewals from existing customers and new customer
contracts signed in 2012 and 2013, offset by the loss of two customers in in the fourth quarter of 2012. Professional services revenue contributed
approximately $2,029,000 in the three months ended September 30, 2013 compared to approximately $864,000 for
18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
the three months ended September 30, 2012 as a result of an
increase in demand for new software capabilities and customizations from our current customer base and implementation of Cover-All Policy for our new
customers.
For the nine months ended September 30, 2013, total
revenues were approximately $15,948,000 compared to approximately $12,260,000 in the same period of the prior year as a result of an increase in
license and professional services revenues for the nine months ended September 30, 2013.
Cost of sales increased to approximately $3,653,000 and
$11,733,000, respectively, for the three and nine months ended September 30, 2013 compared to approximately $3,485,000 and $11,274,000, respectively,
for the same periods in 2012 due to an increase in personnel-related costs for support services in the nine months ended September 30, 2013. We are
expanding our delivery bandwidth while maintaining our costs in line with our revenues through improved productivity and new technology in order to
meet our increasing demand. Non-cash capitalized software amortization was approximately $1,187,000 and $3,460,000, respectively, for the three and
nine months ended September 30, 2013 as compared to approximately $1,003,000 and $2,524,000, respectively, for the same periods in 2012. We capitalized
approximately $373,000 and $1,803,000, respectively, of software development costs in the three and nine months ended September 30, 2013 as compared to
approximately $1,107,000 and $3,786,000, respectively, in the same periods in 2012.
Research and development expenses increased to
approximately $808,000 and $1,634,000, respectively, for the three and nine months ended September 30, 2013 as compared to approximately $178,000 and
$537,000, respectively, for the same periods in 2012 primarily as a result of work on several new products and capabilities. We continue our efforts to
enhance the functionality of our products and solutions and believe that investments in research and development are critical to our remaining
competitive in the marketplace.
Sales and marketing expenses were approximately $601,000
and $1,774,000, respectively, for the three and nine months ended September 30, 2013 as compared to approximately $703,000 and $2,052,000,
respectively, in the same periods of 2012. This decrease in 2013 was primarily due to a reduction in our marketing and sales staff, resulting in a
decrease in personnel-related costs and a decrease in expenditures related to advertising and promotion.
Acquisition expenses were approximately $0 for the three
and nine months ended September 30, 2013 as compared to approximately $0 and $137,000, respectively, in the same periods of 2012. These expenses in
2012 were in connection with the acquisition of substantially all of the assets (excluding working capital) of Hoike Services, Inc. dba BlueWave
Technology in December 2011.
General and administrative expenses increased to
approximately $492,000 and $1,558,000, respectively, in the three and nine months ended September 30, 2013 as compared to approximately $392,000 and
$1,263,000, respectively, in the same periods in 2012. This increase in 2013 was mainly due to personnel-related costs allocated for our new Chief
Executive Officer.
Reorganization expenses,
consisting of severance payments to former employees of the Company, including our former Chief Executive Officer, were approximately
$319,000 for the three and nine months ended September 30, 2013 as compared to $0 in the same periods of 2012.
Liquidity and Capital Resources
Sources of
Liquidity
We have funded our operations
primarily from cash flow from operations and from debt facilities. Cash from operations results primarily from net income from the income statement
plus non-cash expenses (depreciation and amortization) and adjusted for changes in working capital from the balance sheet.
Our largest source of operating
cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related
services. Payments from customers for software licenses are generally received at the beginning of the contract term. Payments from customers for
support services and ASP services are generally received in advance on a quarterly basis. Payments for professional services are generally received 30
days after the services are performed.
19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
On September 11, 2012, we entered
into a Loan and Security Agreement (the Loan Agreement) providing for a $2.25 million credit facility with Imperium Commercial Finance
Master Fund, LP (Imperium), an affiliate of Imperium Partners. The $2.25 million credit facility, which will support our product/services
expansion and growth initiatives, consists of a $2 million three-year term loan, evidenced by a term note bearing interest at a fixed rate of 8% per
annum, and a $250,000 revolving credit facility, evidenced by a revolving credit note also bearing interest at a fixed rate of 8% per annum (together
with the term note, the Imperium Notes). Imperium also received five-year warrants to purchase 1.4 million shares of our common stock, with
an exercise price of $1.48 per share.
In connection with the Imperium
Loan Agreement financing, we incurred deferred financing costs of $92,283, which will be amortized over the life of the loan (or earlier if the loan
becomes due or is repaid before its fixed maturity).
At September 30, 2013, we had
cash and cash equivalents of approximately $1,500,000 compared to cash and cash equivalents of approximately $1,354,000 at December 31, 2012. The
increase in cash and cash equivalents is primarily attributable to the increase in license and professional services revenues in the nine months ended
September 30, 2013.
Cash
Flows
Our ability to generate cash has
depended on a number of different factors, primarily our ability to continue to secure and retain existing customers and generate new license sales and
related product support agreements. In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of
capital to invest in sales and marketing, technology infrastructure and research and development.
Our ability to continue to
control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows. We intend to
maintain our expenses in line with existing revenue streams from maintenance support, ASP services, and professional services and to invest in our
products consistent with our sales efforts.
Balance sheet items that should
be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued
liabilities. Statement of operations items that should be considered in assessing our liquidity include revenues, cost of revenues (net of depreciation
and amortization), operating expenses (net of depreciation and amortization) and other expenses. Statement of cash flows items that should be
considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows
from financing activities.
At September 30, 2013, we had
working capital of approximately $684,000 compared to a working capital deficit of approximately $(533,000) at December 31, 2012. This increase in our
working capital resulted primarily from an increase in license and professional services revenues. For the nine months ended September 30, 2013, net
cash provided from operating activities totaled approximately $2,024,000 compared to approximately $297,000 for the nine months ended September 30,
2012 due to an increase in license and professional services revenues for the for the nine months ended September 30, 2013. In 2013, cash flow from
operating activities represented the Companys principal source of cash and results primarily from net income (loss), less non-cash expense and
changes in working capital.
For the nine months ended
September 30, 2013, net cash used for investing activities was approximately $1,830,000 compared to approximately $4,043,000 for the nine months ended
September 30, 2012. The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from
operations and financing and by borrowings under the Imperium credit facility. For the nine months ended September 30, 2013, net cash provided from
(used for) financing activities was approximately $(48,000) compared to approximately $2,263,000 for the nine months ended September 30, 2012. The cash
used for financing activities in 2013 consisted of the principal payments on our capital lease.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
Funding
Requirements
Our primary uses of cash are for
operating expenses, including personnel-related expenditures, facilities and technology costs, and for interest-only payments under our Loan
Agreement.
We may need additional funding
for any large capital expenditures and for continued product development. We lease computer equipment for terms of three years in order to have the
latest available technology to serve our customers and develop new products.
Interest on the outstanding
principal balance under the Imperium Notes accrues at a fixed rate equal to eight percent (8%) per annum and is payable monthly, in arrears. The
outstanding principal and any remaining interest under the Imperium Notes will be immediately due and payable to Imperium on the earlier of (1)
September 10, 2015 and (2) the date Imperiums obligation to advance funds under the revolving credit line is terminated following an event of
default pursuant to the terms and conditions of the Loan Agreement. Payments and prepayments received by Imperium will be applied against principal and
interest as provided for in the Loan Agreement.
On December 16, 2011, we
announced that our board of directors authorized a share buyback plan of up to 1,000,000 shares of the Companys common stock, in accordance with
Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act). The Imperium Loan Agreement prohibits buybacks of our
common stock.
On December 30, 2011, we
completed the acquisition of the PipelineClaims assets (excluding working capital) of Hoike Services, Inc. dba BlueWave Technology
(BlueWave), a provider of enterprise claims management software to the property and casualty insurance industry based in Honolulu, Hawaii.
The aggregate purchase price for the acquisition, in addition to the assumption by us of certain assumed liabilities, consisted of the following: (i)
$1,100,000 in cash on the closing date, (x) $635,821 of which (net of adjustments for certain prepayments to BlueWave and other prorations) was paid in
cash to BlueWave, and (y) $400,000 of which was deposited into an escrow account to be held and distributed by an escrow agent pursuant to the terms of
an escrow agreement to secure possible future indemnification claims and certain other post-closing matters in our favor; and (ii) up to an aggregate
of $750,000 in an earnout, which earnout will be based upon the performance of the acquired business in the five years following the closing. More
particularly, for each of the five years following the closing, BlueWave will be entitled to receive an amount equal to ten percent (10%) of the
PipelineClaims Free Cash Flow (as such term is defined in the purchase agreement) but in no event will we be required to pay to BlueWave in excess of
$750,000 in the aggregate for the 5-year period. For the first year following the closing of the BlueWave transaction, BlueWave was not entitled to
receive any earnout payment. In December 2012, we received a disbursement from the escrow account of $250,000 as a result of a contractual provision
entitling us to such amount if PipelineClaims was not licensed by Island Insurance by December 31, 2012.
We prepare monthly cash flow
projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, support services and
professional services. We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and
other specific payments, on a rolling twelve-month basis.
We believe that our current cash
balances and anticipated cash flows from operations may be sufficient to meet our normal operating needs for at least the next twelve months. These
projections include anticipated sales of new licenses, the exact timing of which cannot be predicted with absolute certainty and can be influenced by
factors outside the Companys control. Our ability to fund our working capital needs and address planned capital expenditures will depend on our
ability to generate cash in the future. We anticipate generating future working capital through sales to new customers and continued sales and services
to our existing customers.
Our future liquidity and capital
resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face:
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Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond our control. |
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
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Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments. |
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We experience competition in our industry and continuing technological changes. |
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Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult. |
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We compete with a number of larger companies who have greater resources than those of ours. We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance. |
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Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers. |
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A decline in software spending in the insurance industry could result in a decrease in our revenue. |
Material risks to cash flow from
operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business. There can be no assurance
that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected
expenditures.
We do not expect for there to be
a need for a change in the mix or relative cost of our sources of capital.
In May of 2012, the New York State Department of Taxation and Finance commenced an examination for tax years 2009 through 2012 of state sales and use tax. During the pendency of this audit, the Department of Taxation and Finance extended the period of its examination through February 28, 2013. As of the date of this quarterly report on Form 10-Q, the Department of Taxation and Finance has not issued a formal notice of determination or notice of deficiency in this matter; however, we do not expect any tax adjustments that would have a material impact on our financial position or results of operations.
Net Operating Loss Carryforwards
The deferred tax asset from tax net
operating loss carryforwards of approximately $5,879,000 represents approximately $12,000,000 of net operating loss carryforwards which are subject to
expiration beginning in 2023. During the nine months ended September 30, 2013, the deferred tax asset valuation allowance was decreased for the assumed
utilization of prior period net operating loss carryforwards utilized to offset taxable income for the current period, subject to federal alternative
minimum tax limitations. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect the Companys
ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following: increased competition, a
decline in sales or margins, a loss of market share, and a decrease in demand for professional services. Based upon the levels of historical taxable
income and projections for future taxable income over the years in which the deferred tax assets are deductible, at September 30, 2013, management
believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of these deferred tax
assets in the future.
The Tax Reform Act of 1986 enacted a
complex set of rules which limits a companys ability to utilize net operating loss carryforwards and tax credit carryforwards in periods
following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined
testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, and the conversion of
outstanding warrants, or the result of other changes in ownership of our outstanding stock, the Company may experience an ownership change and
consequently out utilization of net operating loss carryforwards could be significantly limited.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
Off-Balance Sheet Transactions
We do not maintain any
off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to
have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Critical Accounting Policies and
Estimates
The SEC has issued cautionary
advice to elicit more precise disclosure in this Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations, about accounting policies that management believes are most critical in portraying our financial results and in requiring
managements most difficult subjective or complex judgments.
The preparation of financial
documents in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and
estimates. On an on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a
valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets. The basis for our estimates are historical
experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the
estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available
from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements.
We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial
statements:
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Revenue Recognition |
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Valuation of Capitalized Software |
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Fair Value Measurements |
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Valuation of Allowance for Doubtful Accounts Receivable |
|
Business Combination, Goodwill and Other Intangible Assets |
Revenue Recognition
Revenue recognition rules are
very complex, and certain judgments affect the application of our revenue policy. The amount and timing of our revenues is difficult to predict, and
any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In addition
to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions,
royalties and other variable expenses.
Our revenues are recognized in
accordance with FASB ASC 986-605, Software Revenue Recognition, as amended. Revenue from the sale of software licenses is predominately
related to the sale of standardized software and is recognized when these software modules are delivered and accepted by the customer, the license term
has begun, the fee is fixed or determinable and collectability is probable. Revenue from support services is recognized ratably over the life of the
contract. Revenue from professional consulting services is recognized when the service is provided.
Amounts invoiced to our customers
in excess of recognizable revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on
specific contract terms and can therefore have a significant impact on deferred revenues in any given period.
Our revenues are derived from the
licensing of our software products, professional services, and support services. We recognize revenue when persuasive evidence of an arrangement
exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
License Revenue. We
recognize our license revenue upon delivery, provided that collection is determined to be probable and no significant obligations
remain.
Services and Support
Revenue. Our services and support revenue is composed of professional services (such as consulting services and training) and support services
(maintenance, support and ASP services). Our professional services revenue is recognized when the services are performed. Our support services are
recognized ratably over the term of the arrangement.
Valuation of Capitalized Software
Costs for the conceptual
formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological
feasibility is established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for
general release to customers. Costs associated with product enhancements that extend the original products life or significantly improve the
original products marketability are also capitalized once technological feasibility for that particular enhancement has been established.
Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic
life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable
value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that
asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated
future costs of completing and deploying of that product, including the costs of performing maintenance and customer support required to satisfy our
responsibility set forth at the time of sale.
Fair Value Measurements
As of September 30, 2013, the
Companys financial instruments primarily consist of cash, short-term trade receivables and payables for which their carrying amounts approximate
fair values.
Valuation of Allowance for Doubtful Accounts
Receivable
Managements estimate of the
allowance for doubtful accounts is based on historical information, historical loss levels, and an analysis of the collectability of individual
accounts. We routinely assess the financial strength of our customers and based upon factors concerning credit risk, establish an allowance for
uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
Business Combination, Goodwill and Other Intangible
Assets
ASC 805, Business
Combinations, requires that the purchase method of accounting be used for all business combinations. It further specifies criteria as to intangible
assets acquired in a business combination that must be recognized and reported separately from goodwill. The intangible assets, other than goodwill,
acquired in the MSBS transaction are being amortized using the straight-line method over their estimated useful lives.
Goodwill represents the cost of
the MSBS assets in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for
impairment. We review our goodwill for impairment annually in the fourth quarter. We also analyze whether any indicators of impairment exist each
quarter. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a
sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change
in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our assets, and/or slower growth rates, among
others.
We estimate the fair value of
MSBS using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of MSBS
exceeds net book value, goodwill is not impaired, and no further testing is necessary. If the net book value exceeds fair value, we perform a second
test to
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
measure the amount of impairment loss. To measure the
amount of any impairment charge, we determine the implied fair value of goodwill in the same manner as in a business combination.
Specifically, we allocate fair value to all assets and
liabilities, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the
implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the
difference.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
We are a smaller reporting
company and this Item is not applicable to us.
Item 4. Controls and Procedures.
As of the end of the period
covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms, and (2) accumulated and communicated to our management, including our principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our
internal control over financial reporting during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
* * * * * * * * *
Statements in this Quarterly
Report on Form 10-Q, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks which may cause the
Companys actual results in future periods to differ materially from expected results. Those risks include, among others, risks associated with
increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution
and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to
complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors
beyond our control. Those and other risks are described in the Companys filings with the SEC over the last 12 months, including our Annual Report
on Form 10-K filed with the SEC on March 29, 2013, copies of which are available from the SEC or may be obtained upon request from the
Company.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
PART II: OTHER
INFORMATION
Item 1A. Risk
Factors.
The risk factors included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 29, 2013, have not materially
changed.
Item
6. Exhibits.
Exhibit No. |
Description | |||||
---|---|---|---|---|---|---|
31.1 |
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||||
31.2 |
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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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. |
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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. |
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101.1* |
The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in
eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (Unaudited); (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited); and (iv) Notes to Consolidated Financial Statements (Unaudited). |
____________________
* |
Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101.1 hereto are not to be deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and are not to be deemed filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections, except as shall be expressly set forth by specific reference in such filing. |
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY |
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SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC. |
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Date: November 1, 2013 |
By: |
/s/ Manish D. Shah |
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Manish D. Shah, President and Chief Executive Officer |
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Date: November 1, 2013 |
By: |
/s/ Ann F. Massey |
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Ann F. Massey, Chief Financial Officer |
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