| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 |
OR
| [ ] | TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________ |
Commission File No.: 0-22693
| InfoTech USA, Inc. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 11-2889809 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 7 Kingsbridge Road, Fairfield, New Jersey 07004 |
| (Address of principal executive offices) (Zip code) |
Registrant's telephone number, including area code: (973) 227-8772
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 is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of each class of our common stock as of August 11, 2004 is as follows:
| Class of Common Stock | Number of Shares |
| Common Stock, par value $.01 per share | 4,895,998 |
INFOTECH USA, INC.
TABLE OF CONTENTS
| Item | Description | Page |
| PART I – FINANCIAL INFORMATION |
| 1. | Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets – June 30, 2004 (unaudited) and September 30, 2003 |
3 |
||
| Consolidated Condensed Statements of Operations – Three and Nine Months Ended June 30, 2004 and 2003 (unaudited) |
4 |
|||
| Consolidated Condensed Statement of Stockholders' Equity – Nine Months Ended June 30, 2004 (unaudited) |
5 |
|||
| Consolidated Condensed Statements of Cash Flows – Nine Months Ended June, 2004 and 2003 (unaudited) |
6 |
|||
| Notes to Consolidated Condensed Financial Statements (unaudited) | 7 | |||
| 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
11 |
||
| 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
| 4. | Controls and Procedures | 15 |
| PART II – OTHER INFORMATION |
| |
6. |
Exhibits and Reports on Form 8-K |
16 |
|
| SIGNATURE | 17 | |||
| EXHIBITS | 18 | |||
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
| INFOTECH USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except par value) |
| Assets | |||||||
| June 30, 2004 | September 30, 2003 | ||||||
| Current Assets | (Unaudited) | ||||||
| Cash and cash equivalents | $ 238 | $ 855 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $97 | 4,446 | 2,955 | |||||
| and $113 | |||||||
| Inventories | 71 | 120 | |||||
| Note receivable - Parent Company | 1,000 | 1,013 | |||||
| Deferred tax assets | 48 | 44 | |||||
| Other current assets | 364 | 283 | |||||
| Total Current Assets | 6,167 | 5,270 | |||||
| Property, equipment and improvements, net | 218 | 325 | |||||
| Goodwill, net | 2,154 | 2,154 | |||||
| Other assets | 1,665 | 1,619 | |||||
| Total Assets | $ 10,204 | $ 9,368 | |||||
| Liabilities and Stockholders' Equity | |||||||
| Current Liabilities | |||||||
| Current maturities of capital lease obligation | $ 2 | $ 21 | |||||
| Line of credit | 1,212 | – | |||||
| Amounts due to Parent Company | 105 | 105 | |||||
| Accounts payable | 283 | 146 | |||||
| Accrued expenses and other liabilities | 1,144 | 1,502 | |||||
| Total Liabilities | 2,746 | 1,774 | |||||
| Commitments and Contingencies | – | – | |||||
| Stockholders' Equity | |||||||
| Preferred shares: | |||||||
| Authorized 5,000 shares, no par value; none issued | – | – | |||||
| Common shares: | |||||||
| Authorized 80,000 shares, $.01 par value; 5,757 shares issued; | 58 | 58 | |||||
| 4,896 shares outstanding | |||||||
| Additional paid-in capital | 6,653 | 6,653 | |||||
| Retained earnings | 1,665 | 1,801 | |||||
| Treasury stock (861 shares, carried at cost) | (918 | ) | (918 | ) | |||
| Total Stockholders' Equity | 7,458 | 7,594 | |||||
| Total Liabilities and Stockholders' Equity | $ 10,204 | $ 9,368 | |||||
| See the accompanying notes to consolidated condensed financial statements. |
| 3 |
| INFOTECH USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) |
| For the Three Months Ended June 30, |
For The Nine Months Ended June 30, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Revenues: | |||||||||
| Product revenue | $ 4,022 | $ 3,333 | $ 10,556 | $ 7,653 | |||||
| Service revenue | 855 | 637 | 2,570 | 1,731 | |||||
| Total revenues | 4,877 | 3,970 | 13,126 | 9,384 | |||||
| Cost of sales: | |||||||||
| Cost of products sold | 3,553 | 3,004 | 9,172 | 6,619 | |||||
| Cost of services sold | 544 | 410 | 1,695 | 1,077 | |||||
| Total cost of products and services sold | 4,097 | 3,414 | 10,867 | 7,696 | |||||
| Gross profit | 780 | 556 | 2,259 | 1,688 | |||||
| Selling, general and administrative expenses | 777 | 658 | 2,381 | 2,488 | |||||
| Depreciation and amortization | 46 | 55 | 138 | 168 | |||||
| Loss from operations | (43 | ) | (157 | ) | (260 | ) | (968 | ) | |
| Other expense | 14 | 9 | 32 | 21 | |||||
| Interest income | (29 | ) | (3 | ) | (106 | ) | (5 | ) | |
| Loss before income tax expense (benefit) | (28 | ) | (163 | ) | (186 | ) | (984 | ) | |
| Income tax expense (benefit) | 3 | (65 | ) | (50 | ) | (378 | ) | ||
| Net loss applicable to common stockholders | $ (31 | ) | $ (98 | ) | $ (136 | ) | $ (606 | ) | |
| Net loss per common share - basic | $ (0.01 | ) | $ (0.02 | ) | $ (0.03 | ) | $ (0.12 | ) | |
| Weighted average number of common shares outstanding - basic | 4,896 | 4,896 | 4,896 | 4,896 | |||||
| See the accompanying notes to consolidated condensed financial statements. |
| 4 |
| INFOTECH USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended June 30, 2004 (In thousands) (Unaudited) |
| Preferred Stock | Common Stock | Additional Paid-In Capital |
Retained Earnings |
Treasury Stock | Total Stockholders' Equity |
||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | ||||||||||||||
| Balance, September 30, 2003 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 1,801 | (861 | ) | $ (918 | ) | $ 7,594 | ||||||||
| Net loss | – | – | – | – | – | (136 | ) | – | – | (136 | ) | ||||||||
| Balance, June 30, 2004 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 1,665 | (861 | ) | $ (918 | ) | $ 7,458 | ||||||||
| See the accompanying notes to consolidated condensed financial statements. |
| 5 |
| INFOTECH USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) |
| For the Nine Months Ended June 30, |
|||||
| 2004 | 2003 | ||||
| Cash flows from operating activities | |||||
| Net loss | $ (136 | ) | $ (606 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||
| Depreciation and amortization | 138 | 168 | |||
| Deferred income taxes | (50 | ) | (378 | ) | |
| Changes in operating assets and liabilities: | |||||
| Increase in accounts receivable | (1,491 | ) | (1,257 | ) | |
| Decrease in inventories | 49 | 65 | |||
| Increase in other current assets | (81 | ) | (116 | ) | |
| Increase in other assets | – | (3 | ) | ||
| (Decrease) increase in accounts payable and accrued expenses | (221 | ) | 922 | ||
| Net cash used in operating activities | (1,792 | ) | (1,205 | ) | |
| Cash flows from investing activities | |||||
| Capital expenditures | (37 | ) | (18 | ) | |
| Payments received on notes receivable - other | – | 18 | |||
| Payments received on (loan to) Parent Company | 13 | (1,000 | ) | ||
| Proceeds from disposition of property and equipment | 6 | – | |||
| Net cash used in investing activities | (18 | ) | (1,000 | ) | |
| Cash flows from financing activities | |||||
| Payments on capital lease obligation | (19 | ) | (16 | ) | |
| Borrowings on Wells Fargo line of credit | 1,212 | – | |||
| Net payments on Parent Company line of credit | – | (34 | ) | ||
| Net cash provided by (used in) financing activities | 1,193 | (50 | ) | ||
| Net decrease in cash and cash equivalents | (617 | ) | (2,255 | ) | |
| Cash and cash equivalents - beginning of period | 855 | 3,398 | |||
| Cash and cash equivalents - end of period | $ 238 | $ 1,143 | |||
| See the accompanying notes to consolidated condensed financial statements. |
| 6 |
In the opinion of management, the accompanying consolidated condensed financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of InfoTech USA, Inc. and its wholly-owned subsidiaries (the “Company”) as of June 30, 2004, their results of operations for the three and nine months ended June 30, 2004 and 2003, changes in stockholders’ equity for the nine months ended June 30, 2004 and cash flows for the nine months ended June 30, 2004 and 2003. Information included in the consolidated condensed balance sheet as of September 30, 2003 has been derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K/A for the year ended September 30, 2003 (the “10-K/A”) previously filed with the Securities and Exchange Commission (the “SEC”). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these consolidated condensed financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the 10-K/A.
The consolidated results of operations for the three and nine months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year ending September 30, 2004.
The financial statements include the accounts of InfoTech USA, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Inventories at June 30, 2004 and September 30, 2003 consist of:
| June 30, 2004 |
September 30, 2003 |
|||
| Finished goods | $ 101 | $ 159 | ||
| Allowance for excess and obsolescence | (30) | (39) | ||
| Totals | $ 71 | $ 120 | ||
As further explained in Note 1 to the Company’s audited financial statements included in the 10-K/A previously filed with the SEC, the Company presents basic net income (loss) per common share and, if appropriate, diluted net income per common share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, ” Earnings per Share”.
7
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
At June 30, 2004 and 2003, the Company had options and warrants outstanding for the purchase of shares of common stock upon exercise as follows:
| 2004 | 2003 | ||||
| Employee stock options | 3,855 | 3,660 | |||
| Warrants (exercisable at $0.5775 per share) | 300 | 300 | |||
| Totals | 4,155 | 3,960 | |||
Since the Company had net losses for the three and nine months ended June 30, 2004 and the three and nine months ended June 30, 2003, the assumed effects of the exercise of employee stock options and warrants would have been anti-dilutive
The Company measures compensation cost related to stock options issued to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” Accordingly, no earned or unearned compensation cost was recognized in the accompanying consolidated condensed financial statements for the stock options granted by the Company to its employees since all of those options have been granted at exercise prices that equaled or exceeded the market value at the date of grant. The Company’s historical net loss and net loss per common share and pro forma net loss and net loss per common share assuming compensation cost had been determined based on the fair value at the grant date for all awards by the Company and amortized over the vesting period consistent with the provisions of SFAS 123 are set forth below:
| Three Months Ended June 30, |
Nine Months Ended June 30, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Net loss - as reported | $ (31 | ) | $ (98 | ) | $ (136 | ) | $ (606 | ) | |
| Deduct total stock-based employee compensation | |||||||||
| expense determined under a fair value based | |||||||||
| method for all awards, net of related tax effects | (71 | ) | (23 | ) | (116 | ) | (68 | ) | |
| Net loss - pro forma | $ (102 | ) | $ (121 | ) | $ (252 | ) | $ (674 | ) | |
| Net loss per share: | |||||||||
| Basic - as reported | $ (.01 | ) | $ (.02 | ) | $ (.03 | ) | $ (.12 | ) | |
| Basic - pro forma | $ (.02 | ) | $ (.02 | ) | $ (.05 | ) | $ (.14 | ) | |
8
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
The fair value of options granted were determined using a Black-Scholes pricing model in accordance with SFAS 123, with the following assumptions used during the three and nine months ended June 30, 2004:
| Risk-free interest rate | 3.5% | |
| Term | 7 years | |
| Dividend yield | 0% | |
| Volatility | 43% |
On June 27, 2003, the Company loaned $1.0 million to its majority stockholder, Applied Digital Solutions, Inc. (“Applied Digital”). Under the terms of the loan agreement, interest, which accrues at an annual rate of 16%, is due and payable on a monthly basis beginning July 31, 2003. On June 28, 2004, the Company and Applied Digital entered into an amendment to the loan agreement pursuant to which the Company agreed to extend the date on which the principal is due from June 30, 2004 to June 30, 2005. As collateral for the loan, Applied Digital has pledged 750 shares of common stock of Digital Angel Corporation (“Digital Angel”), a majority-owned subsidiary of Applied Digital. As of June 30, 2004, the market value of the shares of stock of Digital Angel was approximately $2,475 based on the closing price of Digital Angel’s common stock. The Company assigned its rights under the loan receivable from Applied Digital to Wells Fargo Business Credit, Inc. (“Wells Fargo”) in connection with the credit agreement with Wells Fargo entered into by the Company on June 30, 2004 (see Note 7 below).
On June 30, 2004, the Company’s wholly owned subsidiary, InfoTech USA, Inc., a New Jersey corporation (“InfoTech”), entered into a credit agreement with Wells Fargo providing for a $4,000 credit facility. Amounts borrowed under the credit facility bear interest at Wells Fargo’s prime rate plus 3%. Unless earlier terminated, the credit facility matures on June 29, 2007 and automatically renews for successive one-year periods thereafter unless terminated by InfoTech or Wells Fargo. In connection with the execution of the credit agreement, InfoTech and IBM Credit, LLC (“IBM Credit”) replaced the Agreement for Wholesale Financing dated as of April 20, 1994 between InfoTech and IBM Credit with a new wholesale financing agreement which is secured by a letter of credit in the amount of $600.
Under the terms of the credit agreement, Wells Fargo may, at its election, make advances from time to time in the amounts requested by InfoTech up to an amount equal to the difference between the borrowing base and the sum of (i) the amount outstanding under the credit facility and (ii) the $600 letter of credit outstanding under the credit facility which secures InfoTech’s obligations to IBM Credit under the wholesale financing agreement. The borrowing base is equal to the lesser of (x) $4,000 or (y) the amount equal to (a) 85% of InfoTech’s eligible accounts receivable plus (b) the amount of available funds in the Company’s deposit account with Wells Fargo minus (c) certain specified reserves. As of June 30, 2004, InfoTech had a borrowing base of approximately $2,841 and availability of approximately $1,032 under the credit facility.
9
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
In connection with the execution of the credit agreement, InfoTech paid Wells Fargo an origination fee of $40. Each year, InfoTech will pay Wells Fargo a facility fee of $15 and an unused line fee of 0.5% of the daily unused amount under the credit facility. In addition, InfoTech must pay Wells Fargo minimum monthly interest based on minimum borrowings of $1,500. InfoTech will incur additional fees if the credit facility is terminated by Wells Fargo upon default or if InfoTech terminates the credit facility prior to its termination date. These fees are $120 during the first year of the credit facility, $60 during the second year of the credit facility and $20 after the second year of the credit facility.
The obligations of InfoTech under the credit agreement have been guaranteed by the Company and its subsidiary, Information Technology Services, Inc., a New York corporation. In addition, the Company has pledged the stock of its subsidiaries and has assigned its rights under the loan agreement to Applied Digital. The credit facility is further secured by a first priority security interest in substantially all of the assets of InfoTech.
The credit facility requires the Company to maintain certain financial covenants, including a book net worth (calculated without taking into account any impairment or write-down of goodwill) of at least $7,300, a debt to book net worth ratio of not more than 0.8, and a minimum net income of at least 80% of the projected cumulative net income provided by the Company to Wells Fargo. In addition, the credit facility prohibits the Company from incurring or contracting to incur capital expenditures exceeding $50 in the aggregate during any fiscal year or more than $10 in any one transaction. The credit agreement contains other standard covenants related to the Company’s operations, including prohibitions on the creation of additional liens, the incurrence of additional debt, the payment of dividends, the sale of assets and other corporate transactions by the Company, without Wells Fargo’s consent.
10
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with the accompanying consolidated condensed financial statements and related notes in Item 1 of this report as well as our Annual Report on Form 10-K/A for the year ended September 30, 2003. Certain statements made in this report may contain forward-looking statements. For a description of risks and uncertainties relating to such forward-looking statements, see the Forward-Looking Statements and Associated Risk section later in this Item.
We are a Delaware corporation incorporated in 1997. Through our two wholly-owned subsidiaries, Information Technology Services, Inc. and InfoTech USA, we are a full service provider of information technology, or IT, services and products in the New York City metropolitan area and in New Jersey. We specialize in tailoring our approach to the individual customer needs. Doing business as “InfoTech”, we provide IT consulting, networking, remote access, procurement, storage area networks, deployment, integration and migration services. We also provide on-going system and network maintenance services.
We operate in a highly competitive industry, which in turn places constant pressures on maintaining gross profit margins. Many of our sales are high volume equipment sales, which produce lower-than-average gross profit margins, but are often accompanied by a service arrangement, which yields higher-than-average gross profit margins.
The following table sets forth, for the periods indicated, the percentage relationship to total revenue of certain items in our consolidated condensed statements of operations.
| Relationship to Revenue | |||||||||
| Three Months Ended June 30, |
Nine Months Ended June 30, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| % | % | % | % | ||||||
| Product revenue | 82.5 | 84.0 | 80.4 | 81.6 | |||||
| Service revenue | 17.5 | 16.0 | 19.6 | 18.4 | |||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | |||||
| Cost of products sold | 72.9 | 75.7 | 69.9 | 70.5 | |||||
| Cost of services sold | 11.1 | 10.3 | 12.9 | 11.5 | |||||
| Total cost of products and services sold | 84.0 | 86.0 | 82.8 | 82.0 | |||||
| Gross profit | 16.0 | 14.0 | 17.2 | 18.0 | |||||
| Selling, general and administrative expenses | 15.9 | 16.6 | 18.1 | 26.5 | |||||
| Depreciation and amortization | 1.0 | 1.4 | 1.1 | 1.8 | |||||
| Loss from operations | (0.9 | ) | (4.0 | ) | (2.0 | ) | (10.3 | ) | |
| Other expense | 0.3 | 0.2 | 0.2 | 0.2 | |||||
| Interest income | (0.6 | ) | (0.1 | ) | (0.8 | ) | (0.0 | ) | |
| Loss before income tax expense | (0.6 | ) | (4.1 | ) | (1.4 | ) | (10.5 | ) | |
| Income tax expense | 0.0 | (1.6 | ) | (0.4 | ) | (4.0 | ) | ||
| Net loss applicable to common stockholders | (0.6 | ) | (2.5 | ) | (1.0 | ) | (6.5 | ) | |
11
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003
(in $'000 unless otherwise noted)
Revenue for the third quarter of 2004 was 22.8%, or $907, higher than revenue for the third quarter of 2003. The increase in revenue was primarily a result of improved market conditions and our focus on high-end, Intel-based products and related technical services. Product sales for the third quarter of 2004 were 20.7%, or $689, higher than product sales for the third quarter of 2003, and service sales for the third quarter of 2004 were 34.2%, or $218, higher than service sales for the third quarter of 2003. We expect the IT market conditions to continue to improve for the remainder of the current fiscal year, and, as a result, we anticipate our sales volumes to be ahead of last fiscal year. Our focus on high-end, Intel-based products, such as storage area networks, has generated additional sales from our existing customer base and has helped us to expand our overall customer base.
Gross profit increased by 40.3%, or $224, in the third quarter of 2004 over amounts reported for the same quarter last year. The increase in gross profit was primarily due to the overall increase in revenue. Total gross margin also increased 2.0% in the third quarter of 2004 from the third quarter of 2003. Product margin increased 1.8% in the third quarter of 2004 from the third quarter of 2003. This increase in product margin was primarily due to a greater proportion of high-end, Intel-based product sales in the third quarter of 2004 relative to the third quarter of 2003, which included one high volume low margin sale resulting in lower than usual product margins. Service gross margin also improved slightly in the third quarter of 2004, increasing 0.7% over the same period last year. Despite a competitive climate, we anticipate steady margins for products and services during the remainder of the fiscal year due to the improving IT market conditions and our continued focus on high-end, Intel-based products and services.
Selling, general and administrative expenses for the third quarter of 2004 were 18.1%, or $119, higher than selling, general and administrative expenses for the third quarter of 2003. This increase was primarily due to an increase in the size of our workforce and an increase in sales commissions resulting from increased gross profit. During 2004, we increased the size of our sales and marketing workforce to generate and support higher sales volumes. As market conditions improve, we expect the size of our management and administrative staff to remain relatively unchanged for the remainder of 2004; however, we may change the size of our sales and technical staff as our sales volume fluctuates.
Depreciation and amortization expense for the third quarter of 2004 decreased 16.4%, or $9, from the third quarter of 2003. The decrease was primarily a result of certain assets being fully depreciated during 2003.
Net interest income for the third quarter of 2004 was $26 greater than net interest income for the third quarter of 2003. The increase in net interest income was the result of the loan made to our majority stockholder, Applied Digital Solutions, Inc., on June 30, 2003.
Our net loss for the third quarter of 2004 was $67 lower than our net loss for the third quarter of 2003.
Nine Months Ended June
30, 2004 Compared to the Nine Months Ended June 30, 2003
(in $'000 unless otherwise noted)
Revenue for the first nine months of 2004 was 39.9%, or $3,742, higher than revenue for the first nine months of 2003. The increase in revenue was primarily a result of improved market conditions and our focus on high-end, Intel-based products and related technical services. Product sales for the nine months ended June 30, 2004 were 37.9%, or $2,903, higher than product sales for the nine months ended June 30, 2003, and service sales for the nine months ended June 30, 2004 were 48.5%, or $839, higher than service sales for the nine months ended June 30, 2003. We expect the IT market conditions to continue to improve for the remainder of the current fiscal year, and, as a result, we anticipate our sales volumes to be ahead of last fiscal year. Our focus on high-end, Intel-based products, such as storage area networks, has generated additional sales from our existing customer base and has helped us to expand our overall customer base.
12
Gross profit increased by 33.8%, or $571, in the first nine months of fiscal year 2004 over amounts reported for the same period last year. The increase in gross profit was primarily due to the overall increase in revenue. However, total gross margin decreased 0.8% for the first nine months of 2004 from the first nine months of 2003. Product margins decreased 0.4% in the first nine months of 2004 from the first nine months of 2003, and service margins decreased 3.8% in the first nine months of 2004 from the first nine months of 2003. The drop in total gross margin in the first nine months of 2004 compared to the corresponding period for 2003 was the result of competitive pressures, which affected our pricing, and the underutilization of technicians and engineers in the first quarter of fiscal year 2004. Despite a competitive climate, we anticipate steady margins for products and services during the remainder of the fiscal year due to the improving IT market conditions and our continued focus on high-end, Intel-based products and services.
Selling, general and administrative expenses for the first nine months of 2004 were 4.3%, or $107, lower than selling, general and administrative expenses for the first nine months of 2003. This decrease was primarily due to savings resulting from reductions in the size of our workforce in the second and third quarters of 2003. The decrease was offset in part by a $70 accrual made in the first quarter of 2004 in connection with ongoing legal proceedings and an increase in the size of our workforce during the third quarter of 2004 to generate and support higher sales volumes. As market conditions improve, we expect the size of our management and administrative staff to remain relatively unchanged for the remainder of 2004; however, we may change the size of our sales and technical staff as our sales volume fluctuates.
Depreciation and amortization expense for first nine months of 2004 decreased 17.9%, or $30, from the first nine months of 2003. The decrease was primarily a result of certain assets being fully depreciated during 2003.
Net interest income for the first nine months of 2004 was $101 greater than net interest income for the first nine months of 2003. The increase in net interest income was the result of the loan made to Applied Digital on June 30, 2003.
Our net loss for the first nine months of 2004 was $470 lower than our net loss for the first nine months of 2003.
Liquidity and Capital
Resources
(in $'000 unless otherwise noted)
Our current ratio at June 30, 2004 was 2.24 compared to 2.97 at September 30, 2003. Working capital at June 30, 2004 was $3,421 compared to $3,496 at September 30, 2003, a decrease of $75.
Cash used in operating activities in the first nine months of 2004 was $1,792 compared to cash used in operating activities in the first nine months of 2003 of $1,205. The cash used in operating activities during the nine months ended June 30, 2004 was primarily a result of an increase in accounts receivable, a decrease in our accounts payable and our net loss. The increase in accounts receivable was a result of the increase in sales and the decrease in accounts payable and accrued expenses was a result of the payment of the majority of the amount due to IBM Credit required to complete the closing of the credit facility with Wells Fargo. The cash used in operating activities during the nine months ended June 30, 2003 was primarily a result of our net loss, an increase in accounts receivable and an increase in other current assets offset, in part, by an increase in accounts payable and accrued expenses.
Cash used in investing activities was $18 for the first nine months of 2004 compared to $1,000 for the same period last year. Cash used in investing activities during the nine months ended June 30, 2004 was primarily a result of capital expenditures, which was somewhat offset by a loan payment made on the loan to Applied Digital. The cash used in investing activities of $1,000 for the nine months ended June 30, 2003 was primarily a result of the loan made to Applied Digital.
13
Cash provided by financing activities for the nine months ended June 30, 2004 was $1,193 compared to cash used in financing activities was $50 for the nine months ended June 30, 2003. The cash provided by financing activities in the nine months ended June 30, 2004 was primarily a result of borrowings under our new credit facility with Wells Fargo. This was somewhat offset by payments made on our capital lease obligation. The cash used in financing activities in the nine months ended June 30, 2003 resulted primarily from net repayments on line of credit with Applied Digital and payments made on our capital lease obligation.
Our business activities are capital intensive and, consequently, we finance our operations through financing arrangements with Wells Fargo and IBM Credit. Failure to obtain adequate product financing on a timely basis could have a material adverse affect on our business, results of operations, financial condition and cash flows. Our current financing agreement with Wells Fargo provides for a $4,000 credit facility. See Note 7 to our unaudited condensed consolidated financial statements for the quarter ended June 30, 2004 contained in Part I, Item 1 – Consolidated Condensed Financial Statements for more information about our financing arrangements with Wells Fargo and IBM Credit.
Borrowings under the Wells Fargo financing arrangement amounted to $1,212 at June 30, 2004, and borrowings under the IBM Credit arrangement amounted to $469 at September 30, 2003. An upward trend in our borrowing has developed in recent quarters as a result of a need to provide working capital for our growing business.
We believe that our present financing arrangements with Wells Fargo and IBM Credit and our current cash position will provide us with sufficient capital to fund our operations and capital expenditures through at least June 30, 2005. Our long-term capital needs may require additional sources of credit.
We are still in the process of defending the allegations raised against us by our former president, chief executive officer, chief operating office and director, Anat Ebenstein, a description of which is provided under Part I, Item 3 – Legal Proceedings in our Annual Report on Form 10-K/A for the year ended September 30, 2003. We cannot provide any assurance that we will be successful in defending the pending litigation. An unfavorable outcome in that action, however, may result in a material adverse effect on our liquidity, financial position or results of operations.
Certain statements in this report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the ability to retain key personnel; the continued development of our technical, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the industries in which we operate and compete; potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; our ability to maintain available sources of financing; and changes in our capital structure and cost of capital. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
14
We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks, nor do we invest in speculative financial instruments. For InfoTech USA, borrowings under the financing agreement with Wells Fargo are at the prime rate plus 3%. We do not have any investments in any instruments that are sensitive to changes in the general level of U. S. interest rates.
Due to the nature of our borrowings, we have concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required.
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in our reporting system. Based upon, and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2004 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
15
| (a) | Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). See list of exhibits attached hereto. |
| (b) | Reports on Form 8-K |
On April 30, 2004, we filed a Current Report on Form 8-K under Items 5 and 7 disclosing an April 27, 2004 agreement between IBM Credit and the Company, where IBM agreed to extend the termination date of the credit agreement from April 9, 2004 to June 18, 2004.
On June 22, 2004, we filed a Current Report on Form 8-K under Items 5 and 7 disclosing a June 18, 2004 agreement between IBM Credit and the Company, where IBM agreed to extend the termination date of the credit agreement from June 18, 2004 to July 15, 2004.
On July 8, 2004, we filed a Current Report on Form 8-K under Items 5 and 7 disclosing a new credit facility between Wells Fargo and our wholly-owned subsidiary, InfoTech USA, Inc. a New Jersey Corporation (“InfoTech”). The agreement replaced the agreement between InfoTech and IBM Credit, LLC dated April 20, 1994.
16
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.
| INFOTECH USA, INC. |
| August 12, 2004 | By: | /s/ J. Robert Patterson |
| J. Robert Patterson Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer) |
17
Exhibit |
Description |
3.1 |
Amended and Restated Certificate of Incorporation dated April 21, 1997 (incorporated by reference to Exhibit 3.1 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.2 |
Certificate of Amendment of Certificate of Incorporation dated March 22, 2002 (incorporated by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.3 |
Certificate of Amendment of Certificate of Incorporation dated April 9, 2003 (incorporated by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
3.4 |
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to the registrant's Quarterly Report on Form 10-Q filed with the Commission on May 14, 2003) |
10.1 |
Credit and Security Agreement, dated June 29, 2004, by and among InfoTech USA, Inc., InfoTech USA, Inc., Information Technology Services, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
10.2 |
Guaranty by Corporations, dated June 29, 2004, by and among InfoTech USA, Inc., Information Technology Services, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
10.3 |
Stock Pledge Agreement, dated June 29, 2004, by and between InfoTech USA, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
10.4 |
Collateral Assignment of Note, dated June 29, 2004, by and between InfoTech USA, Inc. and Wells Fargo Business Credit, Inc. (incorporated by reference to Exhibit 10.4 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
10.5 |
Agreement for Wholesale Financing, dated June 30, 2004, by and between IBM Credit, LLC and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.5 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
10.6 |
First Amendment to Loan Documents, dated June 28, 2004, by and between Applied Digital Solutions, Inc. and InfoTech USA, Inc. (incorporated by reference to Exhibit 10.6 to the registrant's Current Report on Form 8-K filed with the Commission on July 8, 2004) |
31.1 |
Certification by Chief Executive Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
Certification by Chief Financial Officer of the registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
Certification by Chief Executive Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
Certification by Chief Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
18