The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:
Total revenues for the three months ended September 30, 2014 were approximately $5,004,000 compared to approximately $5,059,000 for the same period in 2013. License fees were approximately $34,000 for the three months ended September 30, 2014 compared to approximately $1,028,000 in the same period in 2013 as a result of fewer sales to new and existing customers in 2014. For the three months ended September 30, 2014, support services revenues were approximately $2,143,000 compared to approximately $2,002,000 in the same period of the prior year primarily due to the annual renewals from existing customers and new customer contracts signed in 2013. Professional services revenue contributed approximately $2,827,000 in the three months ended September 30, 2014 compared to approximately $2,029,000 in the third quarter of 2013, as a result of an increase in demand for new
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
software capabilities and customizations from our current customer base and implementation of Cover-All Policy for our new customers.
For the nine months ended September 30, 2014, total revenues were approximately $15,213,000 compared to approximately $15,948,000 in the same period of the prior year as a result of an increase in support and professional services revenue offset by a decrease in license sales for the nine months ended September 30, 2014.
Cost of sales was approximately $2,777,000 and $8,248,000, respectively, for the three and nine months ended September 30, 2014 compared to approximately $2,466,000 and $8,273,000, respectively, for the same periods in 2013 due to a decrease in personnel-related costs in the nine months ended September 30, 2014. We are expanding our delivery bandwidth while maintaining our costs in line with our revenues through improved productivity and new technology in order to meet our increasing demand. Non-cash capitalized software amortization was approximately $373,000 and $1,118,000, respectively, for the three and nine months ended September 30, 2014 as compared to approximately $1,187,000 and $3,460,000, respectively, for the same periods in 2013. We capitalized approximately $0 and $0, respectively, of software development costs in the three and nine months ended September 30, 2014 as compared to approximately $373,000 and $1,803,000, respectively, in the same periods in 2013.
The direct margin during the three and nine month periods ended September 30, 2014 was 44.5% and 45.8%, respectively, compared to 51.3% and 48.1%, respectively, in the same periods in 2013. Support services margin increased in the three and nine months ended September 30, 2014 compared to the same periods in 2013 primarily due to several cost saving initiatives. Professional services direct margin increased for the three and nine months ended September 30, 2014, compared to the same periods in 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 approximately $373,000 and $1,118,000, respectively, for the three and nine months ended September 30, 2014, as compared to approximately $1,187,000 and $3,460,000, respectively, in the same periods 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 decreased to approximately $279,000 and $802,000, respectively, for the three and nine months ended September 30, 2014 as compared to approximately $808,000 and $1,634,000, respectively, for the same periods in 2013, primarily as a result of work on fewer new products and 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 approximately $537,000 and $1,559,000, respectively, for the three and nine months ended September 30, 2014 was compared to approximately $601,000 and $1,774,000, respectively, in the same periods of 2013. This decrease in the third quarter of 2014 was primarily due to a decrease in our marketing and sales staff, resulting in a decrease in personnel-related costs and in expenditures related to advertising and promotion.
General and administrative expenses increased to approximately $737,000 and $2,227,000, respectively, in the three and nine months ended September 30, 2014 as compared to approximately $492,000 and $1,558,000, respectively, in the same periods in 2013. This increase in 2014 was mainly due to reclassing of all facilities costs to general and administrative expenses in 2014.
18
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 $2,250,000 credit facility with Imperium Commercial Finance Master Fund, LP, an affiliate of Imperium Partners (the Loan Agreement). The $2,250,000 credit facility, which will support our product/services expansion and growth initiatives, consists of a $2,000,000 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 1,400,000 shares of our common stock, with an exercise price of $1.48 per share.
In connection with the Imperium Loan Agreement financing, we incurred deferred financing costs of $92,283, which will be amortized over the life of the loan (or earlier if the loan becomes due or is repaid before its fixed maturity).
At September 30, 2014, we had cash and cash equivalents of approximately $4,135,000 compared to cash and cash equivalents of approximately $1,849,000 at December 31, 2013. The increase in cash and cash equivalents is primarily attributable to the increase in support and professional services revenue in the nine months ended September 30, 2014.
Cash Flows
Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain existing customers and generate new license sales and related product support agreements. In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development.
Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows. We intend to maintain our expenses in line with existing revenue streams from maintenance support, ASP services and professional services and to invest in our products consistent with our sales efforts.
Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. Statement of operations items that should be considered in assessing our liquidity include revenues, cost of revenues (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses. Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.
At September 30, 2014, we had working capital of approximately $1,006,000 compared to working capital of approximately $(19,000) at December 31, 2013. For the nine months ended September 30, 2014, net cash provided from operating activities totaled approximately $2,380,000 compared to approximately $2,024,000 for the nine months ended September 30, 2013 due to an increase in support and professional services revenue for the nine months ended September 30, 2014. In 2014, cash flow from operating activities represented the Companys
19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
principal source of cash and results primarily from net income (loss), less non-cash expense and changes in working capital.
For the nine months ended September 30, 2014, net cash used for investing activities was approximately $8,000 compared to approximately $1,830,000 for the nine months ended September 30, 2013. The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations. For the nine months ended September 30, 2014, net cash provided from (used for) financing activities was approximately $(86,000) compared to approximately $(48,000) for the nine months ended September 30, 2013. The cash used for financing activities in 2014 consisted of the principal payments on our capital 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 8% per annum and is payable monthly, in arrears. The outstanding principal and any remaining interest under the Imperium Notes will be immediately due and payable to Imperium on the earlier of (1) September 10, 2015 and (2) the date Imperiums obligation to advance funds under the revolving credit line is terminated following an event of default pursuant to the terms and conditions of the Loan Agreement. Payments and prepayments received by Imperium will be applied against principal and interest as provided for in the Loan Agreement.
On December 16, 2011, we announced that our board of directors authorized a share buyback plan of up to 1,000,000 shares of the Companys common stock, in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act). The Imperium Loan Agreement prohibits buybacks of our common stock.
On December 30, 2011, we completed the acquisition of the PipelineClaims assets (excluding working capital) of Hoike Services, Inc. dba BlueWave Technology (BlueWave), a provider of enterprise claims management software to the property and casualty insurance industry based in Honolulu, Hawaii. The aggregate purchase price for the acquisition, in addition to the assumption by us of certain assumed liabilities, consisted of the following: (i) $1,100,000 in cash on the closing date, (x) $635,821 of which (net of adjustments for certain prepayments to BlueWave and other prorations) was paid in cash to BlueWave, and (y) $400,000 of which was deposited into an escrow account to be held and distributed by an escrow agent pursuant to the terms of an escrow agreement to secure possible future indemnification claims and certain other post-closing matters in our favor; and (ii) up to an aggregate of $750,000 in an earnout, which earnout will be based upon the performance of the acquired business in the five years following the closing. More particularly, for each of the five years following the closing, BlueWave will be entitled to receive an amount equal to ten percent (10%) of the PipelineClaims Free Cash Flow (as such term is defined in the purchase agreement) but in no event will we be required to pay to BlueWave in excess of $750,000 in the aggregate for the 5-year period. For 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 not licensed by Island Insurance by December 31, 2012.
We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, support services and professional services. We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis.
20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 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) conducted an examination of the Company for state sales and use tax for audit periods March 1, 2009 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.
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 net operating loss carryforwards which are subject to expiration beginning in 2023. During the nine months ended September 30, 2014, the deferred tax asset valuation allowance was decreased for the assumed utilization of prior period net operating loss carryforwards utilized to offset taxable income for the current period, subject to federal alternative minimum tax limitations. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect the Companys ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following: increased competition, a decline in sales or margins, a loss of market share, and a decrease in demand for professional services. Based upon the levels of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, at September 30, 2014, management
21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of these deferred tax assets in the future.
The Tax Reform Act of 1986 enacted a complex set of rules which limits a companys ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, and the conversion of outstanding warrants, or the result of other changes in ownership of our outstanding stock, the Company may experience an ownership change and consequently 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 on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets. The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
·
Revenue Recognition
·
Valuation of Capitalized Software
·
Valuation of Allowance for Doubtful Accounts Receivable
·
Deferred Tax Asset
Revenue Recognition
Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy. The amount and timing of our revenues is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses.
Our revenues are recognized in accordance with FASB ASC 986-605, Software Revenue Recognition, as amended. Revenue from the sale of software licenses is predominately related to the sale of standardized software and is recognized when these software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable, and collectability is probable. Revenue from support services is recognized
22
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided.
Amounts invoiced to our customers in excess of recognizable revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.
Our revenues are derived from the licensing of our software products, professional services, and support services. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable, and collection is probable.
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 collectability of individual accounts. We routinely assess the financial strength of our customers and, based upon factors concerning credit risk, establish an allowance for uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
Deferred Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning and strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. We estimate our income tax valuation allowance by assessing which deferred tax assets are more-likely-than-not to be recovered in the future. The valuation allowance is based on our estimates of taxable income in each jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. If it appears that we will
23
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
not generate such taxable income, we may need to increase the valuation allowance against the related deferred tax asset in a future period.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company and this Item is not applicable to us.
Item 4.
Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
* * * * * * * * *
Statements in this Quarterly Report on Form 10-Q, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks which may cause the Companys actual results in future periods to differ materially from expected results. Those risks include, among others, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control. Those and other risks are described in the Companys filings with the SEC over the last 12 months, including our Annual Report on Form 10-K filed with the SEC on March 28, 2014, copies of which are available from the SEC or may be obtained upon request from the Company.
24
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 September 30, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (Unaudited); (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 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.
25
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: November 13, 2014
| By:
| /s/ Manish D. Shah
|
| | Manish D. Shah, President and Chief
Executive Officer
|
| | |
| | |
| | |
| | |
Date: November 13, 2014
| By:
| /s/ Ann F. Massey
|
| | Ann F. Massey, Chief Financial Officer
|
26