Item 1. Financial Statements
GLOBECOMM SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
June 30,
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,414
|
|
|
$
|
72,196
|
|
Accounts receivable, net
|
|
|
62,023
|
|
|
|
59,224
|
|
Inventories
|
|
|
32,801
|
|
|
|
30,664
|
|
Prepaid expenses and other current assets
|
|
|
4,432
|
|
|
|
4,101
|
|
Deferred income taxes
|
|
|
1,261
|
|
|
|
7,041
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
171,931
|
|
|
|
173,226
|
|
|
|
|
Fixed assets, net
|
|
|
50,483
|
|
|
|
47,712
|
|
Goodwill
|
|
|
68,649
|
|
|
|
68,463
|
|
Intangibles, net
|
|
|
17,239
|
|
|
|
19,331
|
|
Other assets
|
|
|
1,450
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
309,752
|
|
|
$
|
310,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
30,879
|
|
|
$
|
34,017
|
|
Deferred revenues
|
|
|
5,186
|
|
|
|
4,626
|
|
Accrued payroll and related fringe benefits
|
|
|
4,820
|
|
|
|
6,728
|
|
Other accrued expenses
|
|
|
6,102
|
|
|
|
11,918
|
|
Current portion of long term debt
|
|
|
6,100
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
53,087
|
|
|
|
63,389
|
|
|
|
|
Other liabilities
|
|
|
96
|
|
|
|
230
|
|
Long term debt
|
|
|
10,000
|
|
|
|
14,575
|
|
Deferred income taxes
|
|
|
12,485
|
|
|
|
12,485
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A Junior Participating, shares authorized, issued and outstanding: none at March 31, 2013 and June 30,
2012
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 50,000,000 shares authorized, shares issued: 24,092,979 at March 31, 2013 and 23,510,377 at
June 30, 2012
|
|
|
24
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
209,117
|
|
|
|
205,162
|
|
Retained earnings
|
|
|
28,886
|
|
|
|
18,205
|
|
Treasury stock, at cost, 465,351 shares at March 31, 2013 and June 30, 2012
|
|
|
(2,781
|
)
|
|
|
(2,781
|
)
|
Accumulated other comprehensive (loss)
|
|
|
(1,162
|
)
|
|
|
(1,222
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
234,084
|
|
|
|
219,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
309,752
|
|
|
$
|
310,067
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
|
|
|
|
Revenues from services
|
|
$
|
51,761
|
|
|
$
|
65,931
|
|
|
$
|
149,105
|
|
|
$
|
170,822
|
|
Revenues from infrastructure solutions
|
|
|
26,306
|
|
|
|
44,998
|
|
|
|
89,864
|
|
|
|
106,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
78,067
|
|
|
|
110,929
|
|
|
|
238,969
|
|
|
|
277,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs from services
|
|
|
35,030
|
|
|
|
47,182
|
|
|
|
100,813
|
|
|
|
116,968
|
|
Costs from infrastructure solutions
|
|
|
22,816
|
|
|
|
40,047
|
|
|
|
81,595
|
|
|
|
94,539
|
|
Selling and marketing
|
|
|
4,485
|
|
|
|
4,843
|
|
|
|
13,191
|
|
|
|
14,291
|
|
Research and development
|
|
|
1,194
|
|
|
|
1,398
|
|
|
|
3,133
|
|
|
|
4,902
|
|
General and administrative
|
|
|
8,071
|
|
|
|
8,179
|
|
|
|
23,677
|
|
|
|
24,913
|
|
Earn-out fair value adjustments
|
|
|
|
|
|
|
2,829
|
|
|
|
|
|
|
|
(7,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
71,596
|
|
|
|
104,478
|
|
|
|
222,409
|
|
|
|
247,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,471
|
|
|
|
6,451
|
|
|
|
16,560
|
|
|
|
29,221
|
|
|
|
|
|
|
Interest income
|
|
|
79
|
|
|
|
59
|
|
|
|
246
|
|
|
|
171
|
|
Interest expense
|
|
|
(92
|
)
|
|
|
(141
|
)
|
|
|
(309
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,458
|
|
|
|
6,369
|
|
|
|
16,497
|
|
|
|
28,929
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
2,282
|
|
|
|
3,467
|
|
|
|
5,816
|
|
|
|
7,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,176
|
|
|
$
|
2,902
|
|
|
$
|
10,681
|
|
|
$
|
21,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.47
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.46
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in the calculation of basic net income per common share
|
|
|
22,804
|
|
|
|
22,213
|
|
|
|
22,620
|
|
|
|
22,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in the calculation of diluted net income per common share
|
|
|
23,190
|
|
|
|
22,839
|
|
|
|
23,010
|
|
|
|
22,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
|
|
|
|
Net income
|
|
$
|
4,176
|
|
|
$
|
2,902
|
|
|
$
|
10,681
|
|
|
$
|
21,479
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
(767
|
)
|
|
$
|
69
|
|
|
|
60
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,409
|
|
|
$
|
2,971
|
|
|
$
|
10,741
|
|
|
$
|
21,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2013
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
|
|
|
|
|
|
Total
Stockholders
Equity
|
|
|
|
Common Stock
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at June 30, 2012
|
|
|
23,510
|
|
|
$
|
24
|
|
|
$
|
205,162
|
|
|
$
|
18,205
|
|
|
$
|
(1,222
|
)
|
|
|
465
|
|
|
$
|
(2,781
|
)
|
|
$
|
219,388
|
|
Proceeds from exercise of stock options
|
|
|
136
|
|
|
|
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578
|
|
Proceeds from exercise of warrants
|
|
|
51
|
|
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,869
|
|
Grant of restricted shares
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,681
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
|
24,093
|
|
|
$
|
24
|
|
|
$
|
209,117
|
|
|
$
|
28,886
|
|
|
$
|
(1,162
|
)
|
|
|
465
|
|
|
$
|
(2,781
|
)
|
|
$
|
234,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
GLOBECOMM SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,681
|
|
|
$
|
21,479
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,743
|
|
|
|
9,391
|
|
Provision for doubtful accounts
|
|
|
(213
|
)
|
|
|
125
|
|
Deferred income taxes
|
|
|
5,780
|
|
|
|
6,621
|
|
Stock compensation expense
|
|
|
2,869
|
|
|
|
2,627
|
|
Earn-out fair value adjustments
|
|
|
|
|
|
|
(7,745
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,642
|
)
|
|
|
(618
|
)
|
Inventories
|
|
|
(2,201
|
)
|
|
|
(3,805
|
)
|
Prepaid expenses and other current assets
|
|
|
(349
|
)
|
|
|
(32
|
)
|
Other assets
|
|
|
(107
|
)
|
|
|
923
|
|
Accounts payable
|
|
|
(3,028
|
)
|
|
|
9,288
|
|
Deferred revenue
|
|
|
551
|
|
|
|
(6,556
|
)
|
Accrued payroll and related fringe benefits
|
|
|
(1,864
|
)
|
|
|
558
|
|
Other accrued expenses
|
|
|
(1,243
|
)
|
|
|
503
|
|
Other liabilities
|
|
|
(134
|
)
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,843
|
|
|
|
32,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(9,354
|
)
|
|
|
(9,622
|
)
|
Cash payment for earn-outs
|
|
|
(4,700
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,054
|
)
|
|
|
(14,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
578
|
|
|
|
1,290
|
|
Proceeds from exercise of warrants
|
|
|
508
|
|
|
|
100
|
|
Repayments of debt
|
|
|
(4,575
|
)
|
|
|
(4,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,489
|
)
|
|
|
(3,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
(82
|
)
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(782
|
)
|
|
|
15,391
|
|
Cash and cash equivalents at beginning of period
|
|
|
72,196
|
|
|
|
47,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
71,414
|
|
|
$
|
63,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
315
|
|
|
$
|
476
|
|
Cash paid for income taxes
|
|
|
390
|
|
|
|
702
|
|
See accompanying notes.
7
GLOBECOMM SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair
presentation of the results for such periods have been included. The consolidated balance sheet at June 30, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete financial statements. The results of operations for the three and nine months ended March 31, 2013 are not necessarily indicative of the results
that may be expected for the full fiscal year ending June 30, 2013, or for any future period.
The accompanying
consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended June 30, 2012 and the accompanying notes thereto contained in the Companys Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on September 13, 2012.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned
subsidiaries, Globecomm Network Services Corporation (GNSC), Globecomm Services Maryland LLC (GSM), Cachendo LLC (Cachendo), B.V. Mach 6 (Mach 6), Telaurus Communications LLC (Telaurus),
Melat Networks Inc. (Melat), Evolution Communications Group Limited B.V.I. (Evocomm), Carrier to Carrier Telecom B.V. (C2C), Globecomm Systems SA Proprietary Ltd (Globecomm SA) and ComSource Inc.
(ComSource) (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue Recognition
The Company recognizes revenue for its production-type contracts that are sold separately as standard satellite ground segment systems when persuasive evidence of an arrangement exists, the selling price
is fixed or determinable, collectability is reasonably assured, delivery has occurred and the contractual performance specifications have been met. The Companys standard satellite ground segment systems produced in connection with these
contracts are typically short-term (less than twelve months in term) and manufactured using a standard modular production process. Such systems require less engineering, drafting and design efforts than the Companys long-term complex
production-type projects. Revenue is recognized on the Companys standard satellite ground segment systems upon shipment and acceptance of factory performance testing which is when title transfers to the customer. The amount of revenues
recorded on each standard production-type contract is reduced by the customers contractual holdback amount, which typically requires 10% to 30% of the contract value to be retained by the customer until installation and final acceptance is
complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing. Installation is not deemed to be essential to the functionality of the system since installation
does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and the
8
Company has not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated value of the installation
services is determined by management, which is typically less than the customers contractual holdback percentage. If the holdback is less than the estimated value of installation, the Company will defer recognition of revenues, determined on a
contract-by-contract basis equal to the estimated value of the installation services. Payments received in advance by customers are deferred until shipment and are presented as deferred revenues in the accompanying consolidated balance sheets.
The Company recognizes revenue using the percentage-of-completion method of accounting upon the achievement of certain
contractual milestones for its non-standard, complex production-type contracts for the production of satellite ground segment systems and equipment that are generally integrated into the customers satellite ground segment network. The
equipment and systems produced in connection with these contracts are typically long-term (in excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of
the customizable earth station equipment into the customers ground segment network. These contracts generally have larger contract values, greater economic risks and substantive specific contractual performance requirements due to the
engineering and design complexity of such systems and related equipment. Progress payments received in advance by customers are netted against the inventory balances in the accompanying consolidated balance sheets.
Revenues from services consist of the access, hosted, professional services and lifecycle support service lines. Service revenues are
recognized ratably over the period in which services are provided. Payments received in advance of services are deferred until the period such services are provided and are presented as deferred revenues in the accompanying consolidated balance
sheets.
The Company enters into multiple-element arrangements with its customers including hardware, engineering solutions,
professional services and maintenance services. For arrangements involving multiple deliverables, the Company evaluates and separates each deliverable to determine whether it represents a separate unit of accounting based on whether the delivered
item has value to the customer on a stand-alone basis. Consideration is allocated to each deliverable based on the items relative selling price. The Company uses a hierarchy to determine the selling price to be used to allocate revenue to each
deliverable as follows: (i) vendor-specific objective evidence of the selling price; (ii) third party evidence of selling price; and (iii) best estimate of selling price.
Costs from Services
Costs from services consist primarily of satellite
space segment charges, fiber connectivity fees, voice termination costs and network operations expenses. Satellite space segment charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the
transmission of services to and from the satellites leased from operators. Network operations expenses consist primarily of costs associated with the operation of the Network Operation Centers, on a 24 hour a day, seven-day a week basis, including
personnel and related costs and depreciation.
Costs from Infrastructure Solutions
Costs from infrastructure solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct
labor and related overhead expenses, project-related travel and living costs and subcontractor salaries.
Research and Development
Research and development expenditures are expensed as incurred.
Stock-Based Compensation
Stock compensation expense was approximately
$983,000 and $2,869,000 for the three and nine months ended March 31, 2013, respectively. Stock compensation expense was approximately $862,000 and $2,627,000 for
9
the three and nine months ended March 31, 2012, respectively. As of March 31, 2013, there was approximately $6,293,000 of unrecognized compensation cost related to non-vested restricted
shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 2.1 years. As of March 31, 2013, there was approximately $83,000 of unrecognized compensation cost related to non-vested outstanding
stock options. The cost is expected to be recognized over a weighted-average period of 1.8 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of businesses over the fair value of the identifiable net assets
acquired. Goodwill and other indefinite life intangible assets are tested for impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value
of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the
reporting units goodwill to its implied fair value (i.e., fair value of the reporting unit less the fair value of the units assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its
implied fair value, the excess is required to be recorded as an impairment charge. The Company performs the goodwill impairment test annually in the fourth fiscal quarter. There have been no events in the three and nine months ended March 31,
2013 that would indicate that goodwill and indefinite life intangible assets were impaired.
Comprehensive Income
Comprehensive income for the three and nine months ended March 31, 2013 of approximately $3,409,000 and $10,741,000, respectively,
includes an unrealized foreign currency translation loss of approximately $767,000 and a gain of approximately $60,000, respectively. Comprehensive income for the three and nine months ended March 31, 2012 of approximately $2,971,000 and
$21,121,000, respectively, includes an unrealized foreign currency translation gain of approximately $69,000 and a loss of approximately $358,000, respectively.
Income Taxes
Deferred Tax Assets
Consistent with the provisions of ASC Topic No. 740, Income Taxes, the Company regularly estimates the ability to recover deferred
income taxes, reports such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and estimates income taxes in each of the taxing jurisdictions in which the Company operates. This process involves estimating
current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in
deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company is required to assess the likelihood that the deferred tax assets, which include net operating loss carry forwards and temporary differences that
are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, a valuation allowance must be provided based on estimates of future taxable income in the
various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations. This
evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities, and available tax
planning strategies.
Uncertainty in Tax Positions
The Company recognizes in its financial statements the benefits of tax return positions if that tax position is more likely than not to be sustained on audit based on its technical merits. At
March 31, 2013, the Company had a liability for unrecognized tax benefits of approximately $1,531,000, which, if recognized in the future, would favorably impact the Companys effective tax rate. On a quarterly basis, the Company evaluates
its tax positions and revises its estimates accordingly. The Company believes that none of these tax positions will be resolved within the next twelve months. The Company records both accrued interest and penalties related to income tax matters, if
any,
10
in the provision for income taxes in the accompanying consolidated statements of operations. As of March 31, 2013, the Company had not accrued any amounts for the potential payment of
penalties and interest.
The Company is subject to taxation in the U.S. and various state and foreign taxing jurisdictions.
The Companys federal tax returns for the 2009 through 2012 tax years remain subject to examination. The Company files returns in numerous state jurisdictions with varying statutes of limitation.
Product Warranties
The
Company offers warranties on its contracts, the specific terms and conditions of which vary depending upon the contract and work performed. Generally, a basic limited warranty, including parts and labor, is provided to customers for one year. The
Company can recoup certain of these costs through product warranties it holds with its original equipment manufacturers, which typically are one year in term. Historically, warranty expense has been minimal, however, management periodically assesses
the need for any additional warranty reserve.
Recent Accounting Pronouncements
In September 2011, the FASB issued amended guidance intended to simplify how entities test goodwill for impairment. The amendment
permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011, with early adoption permitted. The adoption of this guidance did not have an impact on the Companys consolidated financial condition or results of operations.
In June 2011, the FASB issued amended guidance that revises the manner in which entities present comprehensive income in their financial
statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive
statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive
income (OCI). The ASU does not change the items that must be reported in OCI. For public entities, the ASUs amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
The adoption of this guidance did not have an impact on the Companys consolidated financial condition or results of operations.
In July 2012, the FASB issued guidance that allows an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is not more
likely than not that the indefinite-lived intangible asset is impaired. An entity no longer will be required to perform the quantitative impairment test of indefinite-lived intangible assets if, after it assesses that the totality of events and
circumstances, the entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. The adoption of this is pronouncement will not have a material impact on the Companys consolidated financial condition or results of operations.
In February 2013, the FASB issued guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity
is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the
amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is
required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is effective for periods beginning after December 15, 2012. The adoption of this is pronouncement will
not have a material impact on the Companys consolidated financial condition or results of operations.
11
2. Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing the net income for the period by the weighted-average number
of common shares outstanding for the period. For diluted earnings per share the weighted average shares include the incremental common shares issuable upon the exercise of stock options, warrants, and unvested restricted shares (using the treasury
stock method). The incremental common shares for stock options, warrants and unvested restricted shares are excluded from the calculation of diluted net income per share, if their effect is anti-dilutive. Diluted net income per share for the three
and nine months ended March 31, 2013 excludes the effect of approximately 316,000 and 330,000 stock options and restricted shares in the calculation of the incremental common shares, as their effect would have been anti-dilutive. Diluted net
income per share for the three and nine months ended March 31, 2012 excludes the effect of approximately 11,000 and 21,000 stock options and restricted shares in the calculation of the incremental common shares, as their effect would have been
anti-dilutive.
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
(Unaudited)
|
|
|
June 30,
2012
|
|
|
|
(In thousands)
|
|
|
|
|
Raw materials and component parts
|
|
$
|
2,778
|
|
|
$
|
1,998
|
|
Work-in-progress
|
|
|
31,549
|
|
|
|
30,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,327
|
|
|
|
32,715
|
|
Less progress payments
|
|
|
1,526
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,801
|
|
|
$
|
30,664
|
|
|
|
|
|
|
|
|
|
|
4. Segment Information
The Company operates through two business segments. Its services segment, through GNSC, GSM, Cachendo, Mach 6,
Telaurus, Melat, Evocomm, C2C, Globecomm SA and ComSource, provides satellite communication services capabilities. Its infrastructure solutions segment, through Globecomm Systems Inc., provides design, engineering and installation of complex ground
segment systems and networks.
The Companys reportable segments are business units that offer different services and
products. The reportable segments are each managed separately because they provide distinct services and products.
12
The following is the Companys business segment information for the three and nine
months ended March 31, 2013 and 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
52,069
|
|
|
$
|
67,403
|
|
|
$
|
150,416
|
|
|
$
|
176,688
|
|
Infrastructure solutions
|
|
|
27,027
|
|
|
|
45,920
|
|
|
|
90,585
|
|
|
|
107,400
|
|
Intercompany eliminations
|
|
|
(1,029
|
)
|
|
|
(2,394
|
)
|
|
|
(2,032
|
)
|
|
|
(6,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
78,067
|
|
|
$
|
110,929
|
|
|
$
|
238,969
|
|
|
$
|
277,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services (1)
|
|
$
|
7,939
|
|
|
$
|
6,628
|
|
|
$
|
22,420
|
|
|
$
|
33,820
|
|
Infrastructure solutions
|
|
|
(1,450
|
)
|
|
|
(231
|
)
|
|
|
(5,866
|
)
|
|
|
(4,566
|
)
|
Interest income
|
|
|
79
|
|
|
|
59
|
|
|
|
246
|
|
|
|
171
|
|
Interest expense
|
|
|
(92
|
)
|
|
|
(141
|
)
|
|
|
(309
|
)
|
|
|
(463
|
)
|
Intercompany eliminations
|
|
|
(18
|
)
|
|
|
54
|
|
|
|
6
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
6,458
|
|
|
$
|
6,369
|
|
|
$
|
16,497
|
|
|
$
|
28,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
2,552
|
|
|
$
|
2,758
|
|
|
$
|
7,579
|
|
|
$
|
8,100
|
|
Infrastructure solutions
|
|
|
399
|
|
|
|
437
|
|
|
|
1,164
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
2,951
|
|
|
$
|
3,195
|
|
|
$
|
8,743
|
|
|
$
|
9,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for fixed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
2,922
|
|
|
$
|
3,970
|
|
|
$
|
7,849
|
|
|
$
|
7,222
|
|
Infrastructure solutions
|
|
|
536
|
|
|
|
515
|
|
|
|
1,505
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for fixed assets
|
|
$
|
3,458
|
|
|
$
|
4,485
|
|
|
$
|
9,354
|
|
|
$
|
9,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The three and nine months ended March 31, 2012 include $2.8 million of expense and $7.7 million of gain recorded for earn-out fair value adjustments, respectively.
|
5. Long Term Debt
Line of Credit
On July 18, 2011, the Company entered into a secured credit facility with Citibank N.A. which expires October 31, 2014. The credit facility is comprised of a $72.5 million line of credit (the
Line) which includes the following sublimits: (a) $30 million available for standby letters of credit; (b) $10 million available for commercial letters of credit; (c) a line for term loans, each having a term of no more
than five years, in the aggregate amount of up to $50 million that can be used for acquisitions; and (d) $15 million available for revolving credit borrowings. The Company is required to pay a commitment fee on the average daily unused portion
of the total commitment based on the Companys consolidated leverage ratio (currently 25 basis points per annum) payable quarterly in arrears.
At the discretion of the Company, advances under the Line bear interest at the prime rate or LIBOR plus applicable margin based on the Companys consolidated leverage ratio and are collateralized by
a first priority security interest on all of the personal property of the Company. At March 31, 2013, the applicable margin on the LIBOR rate was 200 basis points. The Company is required to comply with various ongoing financial covenants,
including with respect to the Companys leverage ratio, minimum cash balance, fixed charge coverage ratio and EBITDA minimums, with which the Company was in compliance at March 31, 2013. As of March 31, 2013, in
13
addition to the C2C Acquisition Loan and ComSource Acquisition Loan described below there were standby letters of credit of approximately $6,511,000, which were applied against and reduced the
amounts available under the credit facility.
As of March 31, 2013 debt consisted of the following (in thousands):
|
|
|
|
|
C2C Acquisition Loan
|
|
$
|
5,000
|
|
ComSource Acquisition Loan
|
|
|
11,100
|
|
|
|
|
|
|
Total debt
|
|
|
16,100
|
|
Less current portion
|
|
|
6,100
|
|
|
|
|
|
|
Long term debt
|
|
$
|
10,000
|
|
|
|
|
|
|
C2C Acquisition Loan
The purchase of C2C and Evocomm was funded, in part, through a five-year $12,500,000 acquisition term loan (C2C Acquisition Loan) provided by Citibank, N.A on March 5, 2010, under the
then-existing credit facility. The C2C Acquisition Loan bears interest at the prime rate or LIBOR plus 200 basis points, at the Companys discretion. The balance is to be paid in equal monthly instalments, excluding interest, of approximately
$208,333 beginning on April 1, 2010. The interest rate in effect as of March 31, 2013 was approximately 2.2% per annum. At March 31, 2013, $5,000,000 was outstanding of which $2,500,000 was due within one year.
ComSource Acquisition Loan
The purchase of ComSource was funded, in part, through a five-year $18,000,000 acquisition term loan (ComSource Acquisition Loan) provided by Citibank, N.A on April 7, 2011. The ComSource
Acquisition Loan bears interest at the prime rate or LIBOR plus 200 basis points, at the Companys discretion. The balance is to be paid in equal monthly instalments, excluding interest, of $300,000 beginning on May 1, 2011. The interest
rate in effect as of March 31, 2013 was approximately 2.2% per annum. At March 31, 2013, $11,100,000 was outstanding of which $3,600,000 was due within one year.
Remaining future minimum payments for each of the following fiscal years under these agreements, excluding interest, are expected to be
(in thousands):
|
|
|
|
|
2013
|
|
|
1,525
|
|
2014
|
|
|
6,100
|
|
2015
|
|
|
5,475
|
|
2016
|
|
|
3,000
|
|
6. Intangibles
Intangibles subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
June 30,
2012
|
|
|
Est. useful life
|
|
|
(In thousands)
|
|
|
|
Customer relationships
|
|
$
|
24,712
|
|
|
$
|
24,617
|
|
|
7-18 years
|
Software
|
|
|
1,287
|
|
|
|
1,287
|
|
|
5 years
|
Contracts backlog
|
|
|
2,425
|
|
|
|
2,406
|
|
|
6 months-2 years
|
Covenant not to compete
|
|
|
125
|
|
|
|
125
|
|
|
3-4 years
|
Trademark
|
|
|
382
|
|
|
|
381
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,931
|
|
|
|
28,816
|
|
|
|
Less accumulated amortization
|
|
|
11,692
|
|
|
|
9,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
$
|
17,239
|
|
|
$
|
19,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Amortization expense of approximately $728,000 and $2,183,000 was included in general and
administrative expenses in the three and nine months ended March 31, 2013, respectively.
Amortization expense of $795,000 and $2,916,000 was included in general and administrative expenses in the three and nine months ended
March 31, 2012, respectively.
Remaining amortization expense for the following five fiscal years related to these
intangible assets is expected to be as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
723
|
|
2014
|
|
|
2,871
|
|
2015
|
|
|
2,578
|
|
2016
|
|
|
2,228
|
|
2017
|
|
|
2,183
|
|
7. Fair Value Measurements
The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy. The
levels of fair value hierarchy are as follows:
Level 1 Quoted prices in active markets for identical assets or
liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
assets or liabilities.
ASC 820 Fair Value Measurements and Disclosures requires the use of observable market inputs
(quoted market prices) when measuring fair value and requires Level 1 quoted price to be used to measure fair value whenever possible.
There were no transfers in or out of the Level 1 and 2 in the nine months ended March 31, 2013.
The book value of the Companys debt of $16,100,000 approximates fair value based upon its variable interest rate.
The fair value of the earn-out accruals is determined using an analysis of projected results as compared to targets in the related acquisition agreement. This analysis was performed using an income
approach valuation method based on unobservable inputs including revenues, gross profit and discount rate, along with the underlying entitys history and outlook and are classified within Level 3 of the valuation hierarchy. The earn-out period
has concluded and there is no liability accrued as of March 31, 2013. The following table sets forth the changes in fair value measurements attributable to the earn-out accruals during the nine months ended March 31, 2013 (in thousands):
|
|
|
|
|
Balance at June 30, 2012
|
|
$
|
4,700
|
|
Payment of earn-out
|
|
|
(4,700
|
)
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
|
|
|
|
|
|
|
15
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations.
You should read the following discussion of our financial condition and results of operations
with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains, in addition to historical information, forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, based on our current expectations, assumptions, estimates and projections. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors which are described in the Risk Factors section of this Quarterly Report and in our other filings with the Securities and Exchange Commission, including our Annual Report
on Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Overview
Our business is global and subject to technological and business
trends in the telecommunications marketplace. We derive much of our revenue from the government marketplace and developing countries. Our business is therefore affected by geopolitical developments involving areas of the world in which our customers
are located, particularly in developing countries and areas of the world involved in armed conflicts, which directly impacts our military-related business. Our business may also be affected by the governments budgetary issues and its recent
efforts to reduce the national deficit and defense spending, which may have a significant effect on our results of operations.
The services and products we offer include: access, hosted, professional services and lifecycle support services, pre-engineered and
systems design and integration products. To provide these services and products, we engineer all the necessary satellite and terrestrial facilities as well as provide the integration services required to implement those facilities. We also operate
and maintain managed networks and provide life cycle support services on an ongoing basis. Our customers generally have network service requirements that include point-to-point or point-to-multipoint connections via a hybrid network of satellite and
terrestrial facilities. In addition to government entities, our customers are communications service providers, commercial enterprises and media and content broadcasters.
Since our services and products are often sold into areas of the world which do not have fiber optic land-based networks, a substantial portion of our revenues are derived from, and are expected to
continue to be derived from, developing countries. These countries carry with them more enhanced risks of doing business than in developed areas of the world, including the possibility of armed conflicts or the risk that more advanced land-based
telecommunications will be implemented over time, and less developed legal protection for intellectual property.
During the
past several years many businesses including ours, have faced uncertain economic environments. If the long-term growth in demand for communications networks does not increase from recent depressed levels, the demand for our infrastructure solutions
may continue to decline or grow more slowly than we expect. The demand for communications networks and the products used in these networks is affected by various factors, many of which are beyond our control. For example, many companies have found
it difficult to raise capital to finish building their communications networks and, therefore, have placed fewer orders. Our infrastructure solutions segment in particular was impacted by this decreased demand and capital spending by our customers,
and we have continued to incur operating losses in this segment over the past several years. We cannot predict the extent to which demand will increase, nor the timing of such demand. The growth and profitability of our services segment in recent
periods may not be sufficient to offset any prolonged continuation of a decline in business in our infrastructure segment.
In
the three months ended March 31, 2013, 15% of our revenues were derived from services rendered to Inmarsat Government. In the nine months ended March 31, 2013, 14% and 13% of our revenues were derived from services rendered to Inmarsat
Government and the US Army CECOM, respectively. We have performed work as a subcontractor to Inmarsat Government since February 2012 for services for the U.S. Government. Previously,
16
similar services were provided to Northrop Grumman Information Technologies Inc. (Northrop) which had a prime contract with the U.S. Government. Our contract for these services as a
subcontractor to Inmarsat Government has a somewhat lower profit margin than our prior agreement with Northrop. This subcontract is expected to continue to be material to our results of operations and has provided profit margin significantly above
our norm. In addition, a significant portion of the revenue with US Army CECOM is derived from a multi-year, $74 million agreement (Contract A) which is a pass-through subcontract entailing little risk of unexpected costs and under which
we earn comparatively lower profit margins Although the identity of customers and contracts may vary from period to period, we have been, and expect to continue to be, dependent on revenues from a small number of customers or contracts in each
period in order to meet our financial goals. From time to time our services to these customers are located in developing countries or otherwise subject to unusual risks.
In a majority of cases, revenues related to contracts for infrastructure solutions and services have been fixed-price contracts. The profitability of such contracts is subject to inherent uncertainties as
to the cost of performance. Cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems encountered in engineering design and testing. Since our business is frequently concentrated in
a limited number of large contracts, a significant cost overrun on any single contract could have a material adverse effect on our business, financial condition and results of operations. In the years ended June 30, 2012 and June 30, 2011,
we recorded $1.5 million and $2.1 million, respectively, for additional costs incurred on a fixed-price contract in the infrastructure segment (Contract B). In the nine months ended March 31, 2013, we recorded $1.0 million for
additional costs incurred on Contract B. In addition, in the nine months ended March 31, 2013, we recorded $1.0 million for additional costs incurred on another fixed-price contract. The additional costs were due in large part to unexpected
difficulties resulting in substantial costs associated with engineering and production issues. The revenues associated with both loss programs are expected to be recognized in fiscal years 2013 and 2014 and will have no profit margin associated with
them, which will negatively impact our gross margin percentages in fiscal years 2013 and 2014 as milestones are reached, as they have negatively impacted our gross margin percentage in the nine months ended March 31, 2013 and the fiscal year
ended June 30, 2012.
Contract costs generally include purchased material, direct labor, overhead and other direct costs.
Anticipated contract losses are recognized, as they become known. Costs from infrastructure solutions consist primarily of the costs of purchased materials (including shipping and handling costs), direct labor and related overhead expenses,
project-related travel and living costs and subcontractor costs. Costs from services consist primarily of satellite space segment charges, voice termination costs, network operations expenses and Internet connectivity fees. Satellite space segment
charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of services to and from the satellites leased from operators. Network operations expenses consist primarily of costs
associated with the operation of the network operations center on a twenty-four hour a day, seven-day a week basis, including personnel and related costs and depreciation. Selling and marketing expenses consist primarily of salaries, travel and
living costs for sales and marketing personnel. Research and development expenses consist primarily of salaries and related overhead expenses. General and administrative expenses consist of expenses associated with our management, finance, contract
and administrative functions, as well as amortization of intangible assets.
Critical Accounting Policies
Certain of our accounting policies require judgment by management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our
customers, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Our accounting policies that require management to apply significant judgment
include:
Revenue Recognition Infrastructure Solutions
We recognize revenue for our production-type contracts that are sold separately as standard satellite ground segment systems when
persuasive evidence of an arrangement exists, the selling price is fixed or determinable, collectability is reasonably assured, delivery has occurred and the contractual performance specifications have been
17
met. Our standard satellite ground segment systems produced in connection with these contracts are typically short-term (less than twelve months in term) and manufactured using a standard modular
production process. Such systems require less engineering, drafting and design efforts than our long-term complex production-type projects. Revenue is recognized on our standard satellite ground segment systems upon shipment and acceptance of
factory performance testing which is when title transfers to the customer. The amount of revenues recorded on each standard production-type contract is reduced by the customers contractual holdback amount, which typically requires 10% to 30%
of the contract value to be retained by the customer until installation and final acceptance is complete. The customer generally becomes obligated to pay 70% to 90% of the contract value upon shipment and acceptance of factory performance testing.
Installation is not deemed to be essential to the functionality of the system since installation does not require significant changes to the features or capabilities of the equipment, does not require complex software integration and interfacing and
we have not experienced any difficulties installing such equipment. In addition, the customer or other third party vendors can install the equipment. The estimated value of the installation services is determined by management, which is typically
less than the customers contractual holdback percentage. If the holdback is less than the estimated value of installation, we will defer recognition of revenues, determined on a contract-by-contract basis equal to the estimated value of the
installation services. Payments received in advance by customers are deferred until shipment and are presented as deferred revenues.
We recognize revenue using the percentage-of-completion method of accounting upon the achievement of certain contractual milestones, for our non-standard, complex production-type contracts for the
production of satellite ground segment systems and equipment that are generally integrated into the customers satellite ground segment network. The equipment and systems produced in connection with these contracts are typically long-term (in
excess of twelve months in term) and require significant customer-specific engineering, drafting and design effort in order to effectively integrate all of the customizable earth station equipment into the customers ground segment network.
These contracts generally have larger contract values, greater economic risks and substantive specific contractual performance requirements due to the engineering and design complexity of such systems and related equipment. Progress payments
received in advance by customers are netted against the inventories balance.
The timing of our revenue recognition is
primarily driven by achieving shipment, final acceptance or other contractual milestones. Project risks including project complexity, political and economic instability in certain regions in which we operate, export restrictions, tariffs, licenses
and other trade barriers which may result in the delay of the achievement of revenue milestones. A delay in achieving a revenue milestone may negatively impact our results of operations.
We enter into multiple-element arrangements with our customers including hardware, engineering solutions, professional services and
maintenance services. For arrangements involving multiple deliverables, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on whether the delivered item has value to the customer on a
stand-alone basis. Consideration is allocated to each deliverable based on the items relative selling price. We use a hierarchy to determine the selling price to be used to allocate revenue to each deliverable as follows:
(i) vendor-specific objective evidence of the selling price; (ii) third party evidence of selling price; and (iii) best estimate of selling price.
Costs from Infrastructure Solutions
Costs related to our
production-type contracts and our non-standard, complex production-type contracts rely on estimates based on total expected contract costs. Typically, these contracts are fixed price projects. We use estimates of the costs applicable to various
elements which we believe are reasonable. Our estimates are assessed continually during the term of these contracts and costs are subject to revisions as the contract progresses to completion. These estimates are subjective based on
managements assessment of project risk. These risks may include project complexity and political and economic instability in certain regions in which we operate. Revisions in cost estimates are reflected in the period in which they become
known. A significant revision in an estimate may negatively impact our results of operations. In the event an estimate indicates that a loss will be incurred at completion, we record the loss as it becomes known.
Goodwill and Other Intangible Assets Impairment
18
Goodwill represents the excess of the purchase price of businesses over the fair value of
the identifiable net assets acquired. The amount of goodwill recorded in our balance sheet has significantly increased over the recent past as we have made several acquisitions. Goodwill and other indefinite life intangible assets are tested for
impairment at least annually. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its
carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting units goodwill to its implied fair value (i.e., fair value of
the reporting unit less the fair value of the units assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment
charge. The impairment test is dependent upon estimated future cash flows of the services segment. There have been no events during the nine months ended March 31, 2013 that would indicate that the goodwill and indefinite life intangible assets
were impaired.
Deferred tax assets
We regularly estimate our ability to recover deferred income taxes, report such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable, and we have to estimate our
income taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the
timing for recognizing revenue and expenses for tax and accounting purposes. These differences may result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We are required to assess the likelihood that our deferred tax assets, which include net operating loss carry forwards and temporary
differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future
taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex
tax regulations. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods, the effect of temporary differences, the expected reversal of deferred tax liabilities and
available tax planning strategies.
At March 31, 2013 and June 30, 2012 we had a liability for unrecognized tax
benefits of approximately $1,531,000 and $1,475,000, respectively, which if recognized in the future, would favorably impact our effective tax rate.
Stock-Based Compensation
Stock-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock
options, and the expected volatility of our stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key
assumptions were used, it could have a material effect on our consolidated financial statements.
As of March 31, 2013,
there was approximately $6,293,000 of unrecognized compensation cost related to non-vested restricted shares and restricted share units. The cost is expected to be recognized over a weighted-average period of 2.1 years. As of March 31, 2013,
there was approximately $83,000 of unrecognized compensation cost related to non-vested outstanding stock options. The cost is expected to be recognized over a weighted-average period of 1.8 years.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customers ability to pay based on a number of
factors, including our past transaction history with the customer and the creditworthiness of the customer. An assessment of
19
the inherent risks in conducting our business with foreign customers is also made since a significant portion of our revenues is international. Management specifically analyzes accounts
receivable, historical bad debts, customer concentrations, customer creditworthiness and current economic trends. If the financial condition of our customers were to deteriorate in the future, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventories
Inventories consist primarily of work-in-progress from costs incurred in connection with specific customer contracts, which are stated at
the lower of cost or market value. In assessing the realizability of inventories, we are required to make estimates of the total contract costs based on the various elements of the work-in-progress. It is possible that changes to these estimates
could cause a reduction in the net realizable value of our inventories.
Recent Accounting Pronouncements
In September 2011, the FASB issued amended guidance intended to simplify how entities test goodwill for impairment. The amendment
permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011, with early adoption permitted. The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.
In June 2011, the FASB issued amended guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in
ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement
would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (OCI). The ASU does not change the items that must
be reported in OCI. For public entities, the ASUs amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have an impact on our
consolidated financial condition or results of operations.
In July 2012, the FASB issued guidance that allows an entity the
option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is not more likely than not that the indefinite-lived intangible asset is impaired. An entity no longer will be required to
perform the quantitative impairment test of indefinite-lived intangible assets if, after it assesses that the totality of events and circumstances, the entity concludes that it is not more likely than not that the indefinite-lived intangible asset
is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this is pronouncement will not have a material impact on our consolidated financial
condition or results of operations.
In February 2013, the FASB issued guidance which requires an entity to provide
information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those
amounts. This guidance is effective for periods beginning after December 15, 2012. The adoption of this is pronouncement will not have a material impact on our consolidated financial condition or results of operations.
Results of Operations
Three and
Nine Months Ended March 31, 2013 and 2012
20
Revenues from Services.
Revenues decreased by $14.2 million, or 21.5%, to $51.8
million for the three months ended March 31, 2013 and decreased by $21.7 million, or 12.7%, to $149.1 million for the nine months ended March 31, 2013, compared to $65.9 million and $170.8 million for the three and nine months ended
March 31, 2012, respectively. The decrease in revenues was primarily due to a significant equipment sale of $12.8 million in the three months ended March 31, 2012 along with a decrease in our access service offering in the government
marketplace due to the reduction of services in Iraq.
Revenues from Infrastructure Solutions.
Revenues decreased by
$18.7 million, or 41.5%, to $26.3 million for the three months ended March 31, 2013 and decreased by $16.4 million, or 15.4%, to $89.9 million for the nine months ended March 31, 2013, compared to $45.0 million and $106.3 million for the
three and nine months ended March 31, 2012, respectively. The decrease in revenues in the three and nine months ended March 31, 2013 was primarily driven by the decrease in achievement of revenue milestones under Contact A which was
substantially complete as of December 31, 2012.
Costs from Services.
Costs from services decreased by $12.2
million, or 25.8%, to $35.0 million for the three months ended March 31, 2013 and decreased by $16.2 million, or 13.8%, to $100.8 million for the nine months ended March 31, 2013, compared to $47.2 million and $117.0 million for the three
and nine months ended March 31, 2012, respectively. Gross margin percentage increased to 32.3% of revenues for the three months ended March 31, 2013 and 32.4% of revenues for the nine months ended March 31, 2013, compared to 28.4% and
31.5% for the three and nine months ended March 31, 2012, respectively. The increase in the gross margin percentage was primarily driven by a significant equipment sale at ComSource with lower margin in the three and nine months ended
March 31, 2012. The gross margin in the services segment has been a key driver of our consolidated income from operations. The future relationship between the revenue and margin growth of our operating segments will depend on a variety of
factors, including the timing of major contracts, which are difficult to predict.
Costs from Infrastructure Solutions.
Costs from infrastructure solutions decreased by $17.2 million, or 43.0%, to $22.8 million for the three months ended March 31, 2013 and decreased by $12.9 million, or 13.7%, to $81.6 million for the nine months ended March 31, 2013,
compared to $40.0 million and $94.5 million for the three and nine months ended March 31, 2012, respectively. The gross margin percentage increased to 13.3% in the three months ended March 31, 2013 and decreased to 9.2% for the nine months
ended March 31, 2013, compared to 11.0% for the three and nine months ended March 31, 2012, respectively. The increase in gross margin percentage in the three months ended March 31, 2013 was mainly attributable to significant
proportion of revenue from Contract A in the prior period, which has lower than normal margin partially offset by milestones reached on Contract B which carries no margin. The decrease in gross margin percentage in the nine months ended
March 31, 2013 was due to $2.0 million of additional costs incurred on fixed price contracts recorded in the six months ended December 31, 2012. The Company expects a significant portion of previously delayed shipments on Contract B, which
carries no margin, to be made in the remainder of fiscal 2013 and fiscal 2014, which in each case will negatively impact our gross margin percentage in the remainder of fiscal 2013 and fiscal 2014 as milestones are reached under that contract.
Selling and Marketing.
Selling and marketing expenses decreased by $0.4 million, or 7.4%, to $4.5 million for the
three months ended March 31, 2013 and decreased by $1.1 million, or 7.7%, to $13.2 million for the nine months ended March 31, 2013, compared to $4.8 million and $14.3 million for the three and nine months ended March 31, 2012,
respectively. The decrease was a result of cost cutting initiatives.
Research and Development
. Research and
development expenses decreased by $0.2 million, or 14.6%, to $1.2 million for the three months ended March 31, 2013 and decreased by $1.8 million, or 36.1%, to $3.1 million for the nine months ended March 31, 2013, compared to $1.4 million
and $4.9 million for the three and nine months ended March 31, 2012, respectively. The decrease was principally due to higher than normal costs in the three and nine months ended March 31, 2012 associated with the Tempo Enterprise Media
Platform and infrastructure program-related development that has been completed.
General and Administrative
. General
and administrative expenses decreased by $0.1 million, or 1.3%, to $8.1 million for the three months ended March 31, 2013 and decreased by $1.2 million, or 5.0%, to $23.7 million for the nine months ended March 31, 2013 compared to $8.2
million and $24.9 million for the three and nine months ended March 31, 2012, respectively. The decrease was a result of a decrease in amortization of intangibles in the
21
three and nine months ended March 31, 2013 of approximately $0.1 million and $0.7 million, respectively, a decrease in accruals for our management incentive plan and other cost cutting
initiatives.
Earn-out Fair Value Adjustments.
The earn-out fair value adjustments charge of $2.8 million and gain
of $7.7 million in the three and nine months ended March 31, 2012, respectively were due to the changes in the estimated earn-out accrual related to the acquisition of ComSource. The earn-out period has concluded and there was no liability
accrued as of March 31, 2013.
Interest Income
. Interest income remained consistent for the three and nine months
ended March 31, 2013, as compared to the prior period.
Interest Expense.
Interest expense decreased for the
three and nine months ended March 31, 2013, as a result of a decrease in outstanding debt resulting from the monthly repayments.
Provision for Income Taxes
. The provision for income taxes decreased by $1.2 million, or 34.2%, to $2.3 million for the three months ended March 31, 2013 and decreased by $1.6 million, or
21.9%, to $5.8 million for the nine months ended March 31, 2013, compared to $3.5 million and $7.5 million for the three and nine months ended March 31, 2012, respectively. The effective tax rate decreased to 35% for the three months ended
March 31, 2013 and increased to 35% for the nine months ended March 31, 2013 compared to 54% and 26% for the three and nine months ended March 31, 2012, respectively, due to the impact in the prior year of earn-out fair value
adjustments which were not subject to tax.
Liquidity and Capital Resources
At March 31, 2013, we had working capital of $118.8 million, including cash and cash equivalents of $71.4 million, net accounts
receivable of $62.0 million, inventories of $32.8 million, prepaid expenses and other current assets of $4.4 million and current deferred income taxes of $1.3 million, offset by $30.9 million in accounts payable, $5.2 million in deferred revenues,
$6.1 million in other accrued expenses, $6.1 million in current portion of long term debt and $4.8 million in accrued payroll and related fringe benefits.
At June 30, 2012, we had working capital of $109.8 million, including cash and cash equivalents of $72.2 million, net accounts receivable of $59.2 million, inventories of $30.7 million, prepaid
expenses and other current assets of $4.1 million and deferred income taxes of $7.0 million, offset by $34.0 million in accounts payable, $4.6 million in deferred revenues, $6.7 million in accrued payroll and related fringe benefits, $11.9 million
in accrued expenses and $6.1 million in current portion of long term debt.
Net cash provided by operating activities during
the nine months ended March 31, 2013 was $16.8 million. This primarily related to net income of $10.7 million, a non-cash item representing depreciation and amortization expense of $8.7 million comprised of depreciation expense related to
hosted mobile core switch asset, satellite earth station equipment and the network operations center and amortization expense related to acquisitions, a decrease in deferred income taxes of $5.8 million due to net income generated in the period, and
non-cash stock compensation expense of $2.9 million offset by a decrease in accounts payable of $3.0 million due to the timing of inventory purchases and payments to vendors, an increase in accounts receivable of $2.6 million due to the timing of
billings and collections from customers, an increase in inventory of $2.2 million due to the timing of shipments and purchases of equipment for milestones to be reached in future periods, a decrease in accrued payroll and related fringe benefits of
$1.9 million due to a decrease in the accrual for our management incentive plan.
Net cash provided by operating activities
during the nine months ended March 31, 2012 was $33.0 million. This primarily related to net income of $21.5 million, a non-cash item representing depreciation and amortization expense of $9.4 million comprised of depreciation expense related
to the network operations center and satellite earth station equipment and amortization expense related to acquisitions, an increase in accounts payable of $9.3 million due to the timing of payments to vendors, a decrease in deferred income taxes of
$6.6 million due to net income generated in the period, and non-cash stock compensation expense of $2.6 million, offset by earn-out fair value adjustments of $7.7 million, a decrease in deferred revenue of $6.6 million due to timing differences
between project billings and revenue recognition milestones resulting from specific customer contracts, and an increase in inventory of $3.8 million due to the timing of shipments and purchases of equipment for milestones to be reached in future
periods.
22
Net cash used in investing activities during the nine months ended March 31, 2013 was
$14.1 million, which related to the purchase of Tempo Enterprise Media Platform assets, network operations center and teleport assets, hosted mobile core switch assets and the implementation of an enterprise resource planning software system of $9.4
million and the payment for the ComSource earn-out of $4.7 million.
Net cash used in investing activities during the nine
months ended March 31, 2012 was $14.1 million, which related to the purchase of network operations center assets, teleport assets, and the implementation of an enterprise resource planning software system of $9.6 million and the final payment
for the C2C and Evocomm earn-out of $4.5 million.
Net cash used in financing activities during the nine months ended
March 31, 2013 was $3.5 million, which primarily related to repayment of long term debt of $4.6 million partially offset by $0.6 million of proceeds from the exercise of stock options and $0.5 million of proceeds from the exercise of warrants.
Net cash used in financing activities during the nine months ended March 31, 2012 was $3.2 million, which primarily
related to repayment of long term debt of $4.6 million partially offset by $1.3 million of proceeds from the exercise of stock options and $0.1 million of proceeds from the exercise of warrants.
On July 18, 2011, we entered into a new secured credit facility with Citibank N.A. which expires October 31, 2014. The credit
facility is comprised of a $72.5 million line of credit (the Line) which includes the following sublimits: (a) $30 million available for standby letters of credit; (b) $10 million available for commercial letters of credit;
(c) a line for term loans, each having a term of no more than five years, in the aggregate amount of up to $50 million that can be used for acquisitions; and (d) $15 million available for revolving credit borrowings. We are required to pay
a commitment fee on the average daily unused portion of the total commitment based on our consolidated leverage ratio (currently 25 basis points per annum) payable quarterly in arrears.
At our discretion, advances under the Line bear interest at the prime rate or LIBOR plus applicable margin based on our leverage ratio
and are collateralized by a first priority security interest on all of our personal property. At March 31, 2013, the applicable margin on the LIBOR rate was 200 basis points. We are required to comply with various ongoing financial covenants,
including with respect to our leverage ratio, minimum cash balance, fixed charge coverage ratio and EBITDA minimums, with which we were in compliance at March 31, 2013. As of March 31, 2013, $16.1 million was outstanding under acquisition
loans, of which $6.1 million was due within one year. In addition, there were standby letters of credit of approximately $6.5 million, which were applied against and reduced the amounts available under the credit facility as of March 31, 2013.
We lease satellite space segment services and other equipment under various operating lease agreements, which expire in
various years through fiscal year ending June 30, 2022. Future minimum lease payments due on these leases through March 31, 2014 are approximately $23.5 million.
At March 31, 2013, we had contractual obligations and other commercial commitments as follows (in thousands):
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Payments Due by Period
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Contractual Obligations
|
|
Total
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Less than 1
year
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|
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1-3 years
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|
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4-5 years
|
|
|
More
than 5
years
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
35,927
|
|
|
$
|
23,521
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|
|
$
|
10,529
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|
|
$
|
1,859
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|
|
$
|
18
|
|
Long term debt
|
|
|
16,100
|
|
|
|
6,100
|
|
|
|
10,000
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|
|
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|
Total contractual obligations
|
|
$
|
52,027
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|
|
$
|
29,621
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|
|
$
|
20,529
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|
|
$
|
1,859
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|
|
$
|
18
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23
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Amount of Commitment Expiration Per Period
|
|
Other Commercial Commitments
|
|
Total
Amounts
Committed
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|
|
Less than 1
year
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
More
Than 5
years
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
6,511
|
|
|
$
|
5,296
|
|
|
$
|
1,215
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|
|
$
|
|
|
|
$
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|
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|
|
Total commercial commitments
|
|
$
|
6,511
|
|
|
$
|
5,296
|
|
|
$
|
1,215
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
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Our tax liability for uncertain tax positions was approximately $1.5 million at March 31, 2013.
Until formal resolutions are reached between us and the tax authorities, the timing and amount of possible audit settlements for uncertain tax benefits is not practicable. Therefore, we do not include this obligation in the table of contractual
obligations.
We expect that our cash and working capital requirements for operating activities may increase as we continue to
implement our business strategy. Management anticipates additional working capital requirements for work in progress for orders as obtained and that we may periodically experience negative cash flows due to variances in quarter to quarter operating
performance and if cash is used to fund any future acquisitions of complementary businesses, technologies and intellectual property. We will use existing working capital and, if required, use our credit facility to meet these additional working
capital requirements.
Our future capital requirements will depend upon many factors, including the success of our marketing
efforts in the services and infrastructure solutions business, the nature and timing of customer orders and the level of capital requirements related to the expansion of our service offerings. Based on current plans, we believe that our existing
capital resources will be sufficient to meet working capital requirements at least through March 31, 2014. However, we cannot assure you that there will be no unforeseen events or circumstances that would consume available resources
significantly before that time.
Additional funds may not be available when needed and, even if available, additional funds
may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the
effect of diluting or adversely affecting the holdings or rights of our existing stockholders. If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including, without limitation,
capital expenditures, research and development activities, the timing and extent of our marketing programs, and we may be required to reduce headcount. We cannot assure you that additional financing will be available to us on acceptable terms, or at
all.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Related Party Transactions
None.