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EXCEL - IDEA: XBRL DOCUMENT - COVER ALL TECHNOLOGIES INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - COVER ALL TECHNOLOGIES INC | d31367_ex31-1.htm |
EX-32.2 - EX-32.2 - COVER ALL TECHNOLOGIES INC | d31367_ex32-2.htm |
EX-31.2 - EX-31.2 - COVER ALL TECHNOLOGIES INC | d31367_ex31-2.htm |
EX-32.1 - EX-32.1 - COVER ALL TECHNOLOGIES INC | d31367_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2014 |
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| OR |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from __________ to __________ |
Commission file number: 1-09228
COVER-ALL TECHNOLOGIES INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 13-2698053 |
(State or other jurisdiction of |
| (IRS Employer |
incorporation or organization) |
| Identification No.) |
412 Mt. Kemble Avenue, Suite 110C, |
| 07960 (Zip code) |
(Address of principal executive offices) |
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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 May 8, 2014 |
Common Stock, $0.01 par value per share |
| 26,638,477 shares |
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014
PART I: | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013 | 3 |
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| Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (Unaudited) | 5 |
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| Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (Unaudited) | 6 |
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| Notes to Consolidated Financial Statements (Unaudited) | 7 |
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Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 13 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 21 |
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Item 4. | Controls and Procedures | 21 |
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PART II: | OTHER INFORMATION |
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Item 1A. | Risk Factors | 23 |
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Item 6. | Exhibits | 23 |
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SIGNATURES | 24 |
• • • • • • • • • •
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| March 31, 2014 |
December 31, 2013 | |
| (Unaudited) |
| |
Assets: |
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Current Assets: |
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| |
Cash and Cash Equivalents | $ 2,171,355 | $ 1,848,571 | |
Accounts Receivable (Less Allowance for Doubtful Accounts of $25,000) | 1,838,322 | 2,604,489 | |
Prepaid Expenses | 623,453 | 491,905 | |
Deferred Tax Asset | 850,500 | 850,500 | |
Total Current Assets | 5,483,630 | 5,795,465 | |
Property and Equipment Net | 634,656 | 708,590 | |
Goodwill | 1,039,114 | 1,039,114 | |
Capitalized Software (Less Accumulated Amortization of $22,677,829 and $22,305,191 in 2014 and 2013, respectively) | 7,591,945 | 7,964,583 | |
Customer Lists/Relationships (Less Accumulated Amortization of $356,500 and $341,333 in 2014 and 2013, respectively) | 45,500 | 60,667 | |
Deferred Tax Asset | 2,674,928 | 2,674,928 | |
Deferred Financing Costs (Net Amortization of $43,667 and $36,082 in 2014 and 2013, respectively) | 48,616 | 56,201 | |
Other Assets | 328,000 | 424,522 | |
Total Assets | $ 17,846,389 | $ 18,724,070 |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
Liabilities and Stockholders Equity: | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 953,612 | $ | 1,059,238 | ||||
Accrued Expenses | 631,221 | 1,412,400 | ||||||
Deferred Charges | 219,679 | 231,051 | ||||||
Current Portion of Capital Lease | 115,862 | 114,640 | ||||||
Unearned Revenue | 2,493,208 | 2,997,455 | ||||||
Total Current Liabilities | 4,413,582 | 5,814,784 | ||||||
Long-Term Liabilities: | ||||||||
Long-Term Debt | 1,687,813 | 1,639,109 | ||||||
Long-Term Portion of Capital Lease | 323,711 | 353,139 | ||||||
Total Long-Term Liabilities | 2,011,524 | 1,992,248 | ||||||
Total Liabilities | 6,425,106 | 7,807,032 | ||||||
Commitments and Contingencies | — | — | ||||||
Stockholders’ Equity: | ||||||||
Common Stock ($0.01 Par Value, Authorized 75,000,000 Shares; 26,638,477 and 26,402,227 Shares Issued and Outstanding in 2014 and 2013, respectively) | 266,385 | 264,022 | ||||||
Additional Paid-In Capital | 32,742,407 | 32,674,374 | ||||||
Accumulated Deficit | (21,587,509 | ) | (22,021,358 | ) | ||||
Total Stockholders’ Equity | 11,421,283 | 10,917,038 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 17,846,389 | $ | 18,724,070 |
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 March 31, | ||
| 2014 |
2013 | |
Revenues: |
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Licenses | $ 807,599 |
$ 3,623,249 | |
Support Services | 2,129,663 |
2,022,963 | |
Professional Services | 2,270,288 |
1,239,621 | |
Total Revenues | 5,207,550 |
6,885,833 | |
Cost of Revenues: |
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Licenses | |
360,000 | |
Support Services | 1,685,454 |
2,677,850 | |
Professional Services | 1,110,657 |
677,281 | |
Total Cost of Revenues | 2,796,111 |
3,715,131 | |
Direct Margin | 2,411,439 |
3,170,702 | |
Operating Expenses: |
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| |
Sales and Marketing | 478,358 |
648,053 | |
General and Administrative | 733,797 |
577,029 | |
Amortization of Capitalized Software | 372,638 |
1,092,107 | |
Research and Development | 295,437 |
51,010 | |
Total Operating Expenses | 1,880,230 |
2,368,199 | |
Operating Income | 531,209 |
802,503 | |
Other (Income) Expense: |
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Interest Expense | 93,672 |
92,511 | |
Interest Income | |
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Other Income | |
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Total Other (Income) Expense | 93,672 |
92,511 | |
Income Before Income Taxes | 437,537 |
709,992 | |
Income Taxes Expense | 3,688 |
4,666 | |
Net Income | $ 433,849 |
$ 705,326 | |
Basic Earnings Per Common Share | $ 0.02 |
$ 0.03 | |
Diluted Earnings Per Common Share | $ 0.02 |
$ 0.03 | |
Weighted Average Number of Common Shares Outstanding for Basic Earnings Per Common Share | 26,543,000 |
26,029,000 | |
Weighted Average Number of Common Shares Outstanding for Diluted Earnings Per Common Share | 26,555,000 |
26,201,000 |
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)
Three months ended March 31, | ||||||||||
2014 | 2013 | |||||||||
Cash Flows Provided By (Used For) Operating Activities: | ||||||||||
Net Income | $ | 433,849 | $ | 705,326 | ||||||
Adjustments to Reconcile Net Income to | ||||||||||
Net Cash Provided By Operating Activities: | ||||||||||
Depreciation | 81,829 | 61,838 | ||||||||
Amortization of Capitalized Software | 372,638 | 1,092,107 | ||||||||
Amortization of Customer Lists/Relationships | 15,167 | 33,500 | ||||||||
Amortization of Stock Based Compensation | 107,017 | 180,329 | ||||||||
Amortization of Deferred Financing Costs | 7,585 | 6,746 | ||||||||
Stock Based Compensation Provided for Services | 12,083 | 9,667 | ||||||||
Changes in Assets and Liabilities: | ||||||||||
(Increase) Decrease in: | ||||||||||
Accounts Receivable | 766,167 | (1,548,826 | ) | |||||||
Prepaid Expenses | (131,548 | ) | (330,298 | ) | ||||||
Other Assets | 96,522 | 107,696 | ||||||||
Increase (Decrease) in: | ||||||||||
Accounts Payable | (105,626 | ) | (495,258 | ) | ||||||
Accrued Liabilities | (781,179 | ) | (130,385 | ) | ||||||
Taxes Payable | — | 16,159 | ||||||||
Deferred Charges | (11,372 | ) | 125,181 | |||||||
Unearned Revenue | (504,247 | ) | (39,236 | ) | ||||||
Net Cash Provided By (Used For) Operating Activities | 358,885 | (205,454 | ) | |||||||
Cash Flows (Used For) Investing Activities: | ||||||||||
Capital Expenditures | (7,895 | ) | (18,315 | ) | ||||||
Capitalized Software Development Expenditures | 0 | (784,379 | ) | |||||||
Net Cash (Used For) Investing Activities | (7,895 | ) | (802,694 | ) | ||||||
Cash Flows (Used For) Financing Activities: | ||||||||||
Capital Lease – Principal Payments | (28,206 | ) | (35,920 | ) | ||||||
Net Cash (Used for) Financing Activities | (28,206 | ) | (35,920 | ) | ||||||
Net Increase in Cash and Cash Equivalents | 322,784 | (1,044,068 | ) | |||||||
Cash and Cash Equivalents – Beginning of Periods | 1,848,571 | 1,353,892 | ||||||||
Cash and Cash Equivalents – End of Periods | $ | 2,171,355 | $ | 309,824 | ||||||
Supplemental Disclosures of Cash Flow Information | ||||||||||
Cash Paid During the Periods for: | ||||||||||
Interest | $ | 44,968 | $ | 49,189 | ||||||
Income Taxes | $ | 3,688 | $ | 8,749 |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6
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, 2013 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 28, 2014 for the fiscal year ended December 31, 2013 (Form 10-K).
Amortization of capitalized software development costs in the amount of $1,092,000, as previously reflected in the Consolidated Statement of Operations for the three months ended March 31, 2013, have been reclassified from Cost of Revenues Licenses to Operating Expenses Amortization of Capitalized Software to conform to the current period presentation. This reclassification had no effect on the previously reported Net Income for the three months ended March 31, 2013.
The Companys policy is to periodically review the estimated useful lives and value of its capitalized software costs. During the quarter ended March 31, 2014, this review indicated that the revised estimated life (5 years) for capitalized software differed from the useful lives (3 years) that had been previously used for amortization purposes in the Companys financial statements. This revision in the estimated life is based upon the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. As a result, the Company revised the estimated useful lives of capitalized software, effective January 1, 2014. The effect of this change in estimate was to decrease amortization expense by $248,000 and to increase operating income and net income by $248,000 for the quarter ended March 31, 2014.
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 March 31, 2014, and results of operations for the three months ended March 31, 2014 and 2013 and the cash flows for the three months ended March 31, 2014 and 2013, as applicable, have been made.
The results of operations for the three months ended March 31, 2014 and 2013 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 had capitalized software development costs of approximately $0 and $784,000 during the three months ended March 31, 2014 and 2013, respectively. Amortization of capitalized software development costs was approximately $373,000 and $1,092,000 for the three months ended March 31, 2014 and 2013, respectively.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[4] Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations:
For the three months ended March 31, 2014 | |||||
| Income (Numerator) |
Shares (Denominator) |
Per Share Amount | ||
Basic EPS: |
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Income Available to Common Stockholders | $ 433,849 |
26,542,644 |
$ 0.02 | ||
Effect of Dilutive Securities: |
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Options and Restricted Stock | |
12,318 |
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Diluted EPS: |
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Income Available to Common Stockholders Plus Assumed Exercises | $ 433,849 |
26,554,962 |
$ 0.02 |
| For the three months ended March 31, 2013 | ||||
| Income (Numerator) |
Shares (Denominator) |
Per Share Amount | ||
Basic EPS: |
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Income Available to Common Stockholders | $ 705,326 |
26,028,606 |
$ 0.03 | ||
Effect of Dilutive Securities: |
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Options and Restricted Stock | |
172,481 |
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Diluted EPS: |
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Income Available to Common Stockholders Plus Assumed Exercises | $ 705,326 |
26,201,087 |
$ 0.03 |
[5] Stock-Based Compensation and Stock Purchase Plans
Stock Options
In the three months ended March 31, 2014 and 2013, we recognized $70,396 and $146,675, respectively, of stock-based compensation expense in our consolidated financial statements.
In June 2005, we adopted the 2005 Stock Incentive Plan (which was amended in 2006 and in 2008). 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 Plan 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. On March 31, 2014, an aggregate of 1,641,275 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.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Expected volatilities are based on historical volatility of the Companys stock during the preceding periods.
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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.
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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.
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The Company does not anticipate issuance of dividends during the expected term.
| 2014 |
| 2013 |
Expected volatility | 41%50% |
| 41%50% |
Weighted-average volatility | 41% |
| 41% |
Expected dividends | 0% |
| 0% |
Expected term (in years) | 3-5 |
| 3-5 |
Risk-free interest rate | 0.46% |
| 3% |
As of March 31, 2014, there was $201,369 of total unrecognized compensation cost related to nonvested share-based compensation arrangements previously granted by the Company. That cost is expected to be recognized over a weighted-average period of 0.7 years.
A summary of the changes in outstanding common stock options for all outstanding plans is as follows:
Shares | Exercise Price Per Share | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | |||||||||||||||
Balance, January 1, 2014 | 1,787,500 | $ 1.00 1.67 | 2.2 years | $ | 1.48 | |||||||||||||
Exercised | (450,000 | ) | 1.04 | — | 1.04 | |||||||||||||
Cancelled | (225,000 | ) | 1.63 | — | 1.63 | |||||||||||||
Balance, March 31, 2014 | 1,112,500 | $ 1.50 1.67 | 2.4 years | $ | 1.62 |
Of the stock options outstanding, an aggregate of 575,500 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 March 31, 2014, there were 1,442,000 warrants outstanding. A summary of the changes in outstanding warrants is as follows:
| Outstanding | Exercise Price | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | |||
Balance, January 1, 2014 | 1,442,000 | 1.48 | 3.7 | $ 1.48 | |||
Balance, March 31, 2014 | 1,442,000 | 1.48 | 3.4 | $ 1.48 |
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Time-Based Restricted Stock Units
A summary of our time-based restricted stock units, or RSUs, for the three months ended March 31, 2014 is as follows:
Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||
Balance, January 1, 2014 | 169,309 | $ | 1.65 | |||||||
Granted | 75,627 | 1.44 | ||||||||
Cancelled | — | — | ||||||||
Vested | (91,250 | ) | 1.65 | |||||||
Balance, March 31, 2014 | 153,686 | $ | 1.55 |
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 the 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 $4,673,000 represents approximately $11,800,000 of net operating loss carryforwards which are subject to expiration beginning in 2023. During the three months ended March 31, 2014, the deferred tax asset valuation allowance was decreased for the assumed utilization of prior period net operating loss carryfowards 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 March 31, 2014, management believes 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 as a result of other changes in ownership of our outstanding stock, the Company may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.
[7] Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
effective will not have a material impact on its financial position or consolidated results of operations upon adoption.
In July 2013, the FASB issued an accounting standard update, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. This standard requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. This standard is effective prospectively for annual and interim periods beginning December 16, 2013. The adoption of this guidance did not have a significant effect on the consolidated financial statements.
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 eighty percent 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 March 31, 2014, no balance was outstanding under the Revolving Credit Line. As of March 31, 2014 the Long-Term Debt balance consists of the following:
Principal Balance Outstanding | $ | 2,000,000 | ||
Discount | (312,187 | ) | ||
Long-Term Debt | $ | 1,687,813 |
Interest on the outstanding principal balance under the Imperium Notes accrues at a fixed rate equal to eight percent 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 earlier of (1) September 10, 2015, or (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.
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 EBITDA, tested annually, commencing with the twelve months ending September 30, 2013.
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 SEC, 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
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 on 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
The New York State Department of Taxation and Finance (the Department) commenced an examination of the Company for state sales and use tax for audit periods March 1, 2009 through May 31, 2012. During this audit, the Department extended its examination through February 28, 2013. In February 2014, the Company received a Statement of Proposed Audit Change from the Department. The Change asserts proposed Sales and Use Tax due in the amount of approximately $191,600 together with interest of approximately $46,400. Interest will continue to accrue on the proposed outstanding balances until the date of payment. On March 11, 2014, the Company paid the Department an aggregate of approximately $238,000 in satisfaction in full of all amounts owed in connection with such examination.
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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 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 report on Form 10-Q and in our other filings filed with the Securities and Exchange Commission (SEC) over the last 12 months, including our Form 10-K filed with the SEC on March 28, 2014, these risks, uncertainties and contingency 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 ongoing 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 March 31, 2014 decreased to $5,208,000 from $6,886,000 for the three months ended March 31, 2013, mainly due to a decrease in license revenue offset by an increase in support and professional services revenue in 2014.
The following is an overview of the key components of our revenue and other important financial data for the three months ended March 31, 2014:
Software Licenses. Our license revenue in the three months ended March 31, 2014 was $808,000 compared to $3,623,000 for the three months ended March 31, 2013, resulting from fewer sales to new customers and fewer sales to existing customers who chose to renew, add onto or extend their use of our software. 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. The timing of new software license sales can substantially affect our quarterly results.
Support Services. Support services revenue was $2,130,000 in the three months ended March 31, 2014 compared to $2,023,000 in the same period in 2013. The increase in the first three months of 2014 was mainly due to the annual renewal of existing customers support services and support services from new customer contracts signed in 2013. Support services revenue is influenced primarily by the following factors: the renewal rate from our existing customer base, the amount of new support services associated with new license sales, and annual price increases.
Professional Services. The increase in professional services revenue, to $2,270,000 in the three months ended March 31, 2014 from $1,240,000 in the same period of 2013, was a result of increased demand for new software capabilities and customizations from our current customer base and new and existing customer implementations resulting from contracts signed in 2013.
Income before Provision for Income Taxes. Income before provision for income taxes was $438,000 in the three months ended March 31, 2014 compared to $710,000 in the same period of 2013 as a result of a decrease in license revenue in 2014 offset by an increase in support and professional services revenue in 2014 and various cost saving programs.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
Net Income. Net income for the three months ended March 31, 2014 decreased to approximately $434,000 from $705,000 in the same period of 2013 as a result of a decrease in license revenue offset by an increase in support and professional services revenue and various cost saving programs.
EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA), a non-GAAP metric, was $1,008,000 for the three months ended March 31, 2014 compared to $1,997,000 for the three months ended March 31, 2013.
Cash Flow. As of March 31, 2014, we had $2,171,000 in cash and cash equivalents on hand and $1,838,000 in accounts receivable.
We continue to face competition for growth in 2014 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, the significant expansion of our relationship with a very large customer and the introduction of additional software capabilities, we are expanding our sales and marketing efforts to both new and existing customers. Consequently, we continue to incur additional 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 three months of 2014, the non-cash charge for amortization of capitalized software decreased to $373,000 from $1,092,000 in the same period in 2013, and we expect this amount to be approximately $1.5 million, or $0.06 per share, in 2014, 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. 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 the Company, limiting their usefulness as comparative tools. We compensate for these limitations by relying on our U.S. GAAP results and using EBITDA only supplementally.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
The following is an unaudited reconciliation of U.S. GAAP net income to EBITDA for the three months ended March 31, 2014 and 2013:
Three months ended March 31, | ||||||||
2014 | 2013 | |||||||
Net Income | $ | 433,849 | $ | 705,326 | ||||
Interest (Income) Expense, Net | 93,672 | 92,511 | ||||||
Income Tax Expense | 3,688 | 4,666 | ||||||
Depreciation | 81,829 | 61,838 | ||||||
Amortization: | ||||||||
Amortization of Capitalized Software | 372,638 | 1,092,107 | ||||||
Amortization of Customer Lists/Relationships | 15,167 | 33,500 | ||||||
Amortization of Deferred Financing Costs | 7,585 | 6,746 | ||||||
Total Amortization | $ | 395,390 | $ | 1,132,353 | ||||
EBITDA | $ | 1,008,428 | $ | 1,996,694 | ||||
EBITDA per Common Share: | ||||||||
Basic | $ | 0.04 | $ | 0.08 | ||||
Diluted | $ | 0.04 | $ | 0.08 |
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 March 31, | ||||||||||||||||||
2014 | 2013 | |||||||||||||||||
Revenues: | ||||||||||||||||||
License | 15.5 | % | 52.6 | % | ||||||||||||||
Support Services | 40.9 | 29.4 | ||||||||||||||||
Professional Services | 43.6 | 18.0 | ||||||||||||||||
Total Revenues | 100.0 | 100.0 | ||||||||||||||||
Cost of Revenues: | ||||||||||||||||||
License | — | 5.2 | ||||||||||||||||
Support Services | 32.4 | 38.9 | ||||||||||||||||
Professional Services | 21.3 | 9.8 | ||||||||||||||||
Total Cost of Revenues | 53.7 | 53.9 | ||||||||||||||||
Direct Margin | 46.3 | 46.1 | ||||||||||||||||
Operating Expenses: | ||||||||||||||||||
Sales and Marketing | 9.2 | 9.4 | ||||||||||||||||
General and Administrative | 14.1 | 8.4 | ||||||||||||||||
Amortization of Capitalized Software | 7.1 | 15.9 | ||||||||||||||||
Research and Development | 5.7 | 0.7 | ||||||||||||||||
Total Operating Expenses | 36.1 | 34.4 | ||||||||||||||||
Operating (Expense) Income | 10.2 | 11.7 | ||||||||||||||||
Other Expense (Income): | ||||||||||||||||||
Interest Expense | 1.8 | 1.4 | ||||||||||||||||
Interest Income | — | — | ||||||||||||||||
Other Income | — | — | ||||||||||||||||
Total Other Expense (Income) | 1.8 | 1.4 | ||||||||||||||||
Income Before Income Taxes | 8.4 | 10.3 | ||||||||||||||||
Income Taxes | 0.1 | 0.1 | ||||||||||||||||
Net Income (Loss) | 8.3 | % | 10.2 | % |
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Total revenues for the three months ended March 31, 2014 were $5,208,000 as compared to $6,886,000 for the same period in 2013. License fees were $808,000 for the three months ended March 31, 2014, as compared $3,623,000 in the same period in 2013, as a result of fewer sales to new and existing customers. For the three months ended March 31, 2014, support services revenues were $2,130,000, as compared to $2,023,000 in the same period of the prior year, primarily due to the annual renewals from our existing customers and the new customer contracts signed in 2013. Professional services revenue contributed $2,270,000 in the three months ended March 31, 2014, as compared to $1,240,000 in the first quarter of 2013, as a result of an increase in demand for new software capabilities and customizations from our current and new customer base and implementation of certain customers who signed contracts in 2013.
Cost of revenues decreased to $2,796,000 for the three months ended March 31, 2014, as compared to $3,715,000 for the same period in 2013, due to various cost saving initiatives in 2014. We are expanding our delivery bandwidth through improved productivity and new technology in order to meet our continually increasing demand. Non-cash capitalized software amortization was $373,000 for the three months ended March 31, 2014 as compared to $1,092,000 for the same period in 2013. The Company capitalized $0 of software development costs in the first three months of 2014 as compared to $784,000 in the same period in 2013.
The direct margin during the three month period ended March 31, 2014 was 46.3% compared to 46.1% in the same period of last year. Support services margin increased in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to several cost saving initiatives. Professional services direct margin increased for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to use of offshore resources to provide customizations to new and existing customers.
We expect our quarterly gross margin to vary in percentage terms in future periods as we experience changes in the mix between higher gross margin license revenues and lower gross margin services revenues.
Amortization of capitalized software was $373,000 for the three months ended March 31, 2014 as compared to $1,092,000 in the same period of 2013. The Company revised the estimated useful life of its capitalized software, effective January 1, 2014, from three years to five years.
Research and development expenses were $295,000 for the three months ended March 31, 2014 as compared to $51,000 for the same period in 2013, primarily as a result of our efforts to develop new capability to better service our customers. We capitalize certain costs related to the build out of new product capabilities. We are continuing our ongoing 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 $478,000 for the three months ended March 31, 2014 as compared to $648,000 in the same period of 2013. This decrease in 2014 was primarily due to various cost containment programs.
General and administrative expenses were $734,000 in the three months ended March 31, 2014 as compared to $577,000 in the same period in 2013. This increase in 2014 was mainly due to personnel-related costs and the allocation of facility related costs to general and administrative expenses effective January 1, 2014.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 is 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.
On September 11, 2012, we entered into a $2.25 million credit facility with Imperium Commercial Finance Master Fund, LP, an affiliate of Imperium Partners (the Loan Agreement). 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, bearing interest at a fixed rate of 8% per annum, and a $250,000 revolving credit facility, also bearing interest at a fixed rate of 8% per annum. 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 March 31, 2014, we had cash and cash equivalents of $2,171,000 compared to cash and cash equivalents of $310,000 at March 31, 2013. The increase in cash and cash equivalents is primarily attributable to an increase in support and professional services revenue and various cost saving programs.
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.
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 March 31, 2014, we had working capital of approximately $1,070,000 compared to working capital of approximately $825,000 at March 31, 2013. This increase in our working capital resulted primarily from an increase in support and professional services revenue and various cost saving programs. For the three months ended March 31, 2014, net cash provided from (used for) operating activities totaled approximately $359,000 compared to approximately $(205,000) for the three months ended March 31, 2013. In 2014, cash flow from operating activities represented the Companys principal source of cash and results primarily from net income, plus non-cash expense and changes in working capital.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
For the three months ended March 31, 2014, net cash used for investing activities was approximately $8,000 as compared to approximately $803,000 for the three months ended March 31, 2013. The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations. For the three months ended March 31, 2014, net cash (used for) financing activities was approximately ($28,000) compared to approximately ($36,000) for the three months ended March 31, 2013. The cash provided from financing activities in 2014 consisted of principal payments on our furniture lease.
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 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 of 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, the Company 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 the Company 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 favor of the Company; 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 of the PipelineClaims Free Cash Flow (as such term is defined in the purchase agreement) but in no event will the Company be required to pay to BlueWave in excess of $750,000 in the aggregate for the 5-year period. For each of the first two years 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 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 will 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
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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:
·
Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond our control.
·
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.
·
We experience competition in our industry and continuing technological changes.
·
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.
·
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.
·
Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers.
·
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.
The New York State Department of Taxation and Finance (the Department) commenced an examination of the Company for state sales and use tax for audit periods March 1, 2009 through May 31, 2012. During this audit, the Department extended its examination through February 28, 2013. In February 2014, the Company received a Statement of Proposed Audit Change from the Department. The Change asserts proposed Sales and Use Tax due in the amount of approximately $191,600 together with interest of approximately $46,400. Interest will continue to accrue on the proposed outstanding balances until date of payment. On March 11, 2014, the Company paid the Department an aggregate of approximately $238,000 in satisfaction in full of all amounts owed in connection with such examination.
Net Operating Loss Carryforwards
The deferred tax asset from tax net operating loss carryforwards of approximately $4,673,000 represents approximately $11,800,000 of federal net operating loss carryforwards which are subject to expiration beginning in 2023. During the three months ended March 31, 2014, the deferred tax asset valuation allowance was decreased for the assumed utilization of prior period net operating loss carryfowards 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 March 31, 2014 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.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 our utilization of net operating loss carryforwards could be significantly limited.
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 ongoing 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:
·
Revenue Recognition
·
Valuation of Capitalized Software
·
Valuation of Allowance for Doubtful Accounts Receivable
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 collectibility 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.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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.
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.
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 collectibility 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.
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 report, 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 Securities Exchange Act of 1934, as amended (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
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
* * * * * * * * *
Statements in this 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 Form 10-K filed with the SEC on March 28, 2014, 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, 2013, filed with the SEC on March 28, 2014, 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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
101.1* |
| The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013; (ii) Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (Unaudited); (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 (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
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. | |
| ||
Date: May 15, 2014 | By: | /s/ Manish D. Shah |
|
| Manish D. Shah, President and Chief Executive Officer |
| ||
Date: May 15, 2014 | By: | /s/ Ann F. Massey |
|
| Ann F. Massey, Chief Financial Officer |