Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 30, 2010
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or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _________________ to
_________________
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Commission
File Number 000-27083
MAM
SOFTWARE GROUP, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
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84-1108035
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(State
or other jurisdiction of
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(I.R.S.
employer
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incorporation
or organization)
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identification
no.)
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Maple
Park, Maple Court, Tankersley, Barnsley, UK S75 3DP
(Address
of principal executive offices)(Zip code)
011 44
124 431 1794
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated filer
¨ Non-accelerated
filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
registrant has 137,910,887 shares of common stock outstanding as of November 1,
2010.
TABLE OF
CONTENTS
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Page
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PART
I. Financial Information:
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Item
1.
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Financial
Statements
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1
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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2
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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7
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Item
4T.
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Controls
and Procedures
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8
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PART
II. Other Information:
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9
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Item
1.
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Legal
Proceedings
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9
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Item
1A.
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Risk
Factors
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9
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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9
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Item
3.
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Defaults
Upon Senior Securities
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9
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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10
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Item
5.
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Other
Information
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10
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Item
6.
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Exhibits
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10
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Signatures
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11
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Unless
the context indicates or requires otherwise, (i) the term “MAM” refers to MAM
Software Group, Inc. and its principal operating subsidiaries; (ii) the term
“MAM Software” refers to MAM Software Limited and its operating subsidiaries;
(iii) the term “ASNA” refers to Aftersoft Network N.A., Inc. and its operating
subsidiaries;(iv) the term “EXP” refers to EXP Dealer Software Limited; and (v)
the terms “we,” “our,” “ours,” “us” and the “Company” refer collectively to MAM
Software Group, Inc.
ITEM
1. FINANCIAL STATEMENTS
Index
to Financial Statements
Condensed
Consolidated Balance Sheets
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F-1
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Condensed
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
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F-2
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Condensed
Consolidated Statements of Cash Flows (Unaudited)
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F-3
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Notes
to Condensed Consolidated Financial Statements (Unaudited)
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F-5
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MAM
SOFTWARE GROUP, INC.
Condensed
Consolidated Balance Sheets
(In
thousands, except share and per share
data)
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September
30,
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June
30,
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2010
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2010
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ASSETS
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(unaudited)
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Current
Assets
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Cash
and cash equivalents
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$
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847
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$
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1,196
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Accounts
receivable, net of allowance of $128 and $192
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2,991
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2,520
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Inventories
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297
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366
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Prepaid
expenses and other current assets
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643
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371
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Total
Current Assets
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4,778
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4,453
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Property
and Equipment, net
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840
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856
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Other
Assets
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Goodwill
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9,242
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8,924
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Amortizable
intangible assets, net
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2,621
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2,757
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Software
development costs, net
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1,508
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1,520
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Other
long-term assets
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42
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49
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TOTAL
ASSETS
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$
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19,031
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$
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18,559
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
Liabilities
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Accounts
payable
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$
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1,208
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$
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1,551
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Accrued
expenses and other
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2,627
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1,758
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Payroll
and other taxes
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330
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364
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Current
portion of settlement liability
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332
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326
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Derivative
liabilities
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343
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291
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Current
portion of long-term debt
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3,042
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5,000
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Current
portion of deferred revenue
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412
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641
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Sales
tax payable
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703
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598
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Income
tax payable
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810
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659
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Total
Current Liabilities
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9,807
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11,188
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Long-Term
Liabilities
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Deferred
revenue, net of current portion
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225
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345
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Deferred
income taxes
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510
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642
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Settlement
liability, net of current portion
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440
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525
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Long-term
debt, net of current portion
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1,518
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168
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Other
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348
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359
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Total
Liabilities
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12,848
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13,227
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Commitments
and contingencies
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Stockholders'
Equity
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Preferred
stock: Par value $0.0001 per share; 10,000,000 shares authorized,
1,792,662 and 0 issued and outstanding, respectively
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–
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–
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Common
stock: Par value $0.0001 per share; 150,000,000 shares authorized,
85,860,185 and 84,862,880 shares issued and outstanding,
respectively
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9
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8
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Additional
paid-in capital
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29,582
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29,503
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Accumulated
other comprehensive loss
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(434
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)
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(768
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)
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Accumulated
deficit
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|
(22,974
|
)
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)
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Total
Stockholders' Equity
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6,183
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5,332
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$
|
19,031
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$
|
18,559
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The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
MAM
SOFTWARE GROUP, INC.
Condensed
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In
thousands, except share and per share data)
|
|
For the
three
months
ended
September 30,
2010
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For the
three
months
ended
September 30,
2009
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Revenues
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$
|
6,602
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$
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6,212
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Cost
of revenues
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2,995
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2,947
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Gross
Profit
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|
3,607
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3,265
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Operating
Expenses
|
|
|
|
|
|
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Research
and development
|
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|
819
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844
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Sales
and marketing
|
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|
618
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644
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General
and administrative
|
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|
696
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|
905
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Depreciation
and amortization
|
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268
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282
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Total
Operating Expenses
|
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|
2,401
|
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|
2,675
|
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Operating
Income
|
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|
1,206
|
|
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|
590
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|
|
|
|
|
|
|
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Other
Income (Expense)
|
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|
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|
|
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|
Interest
expense
|
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|
(417
|
)
|
|
|
(378
|
)
|
Gain
on settlement of liability
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|
-
|
|
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|
50
|
|
Change
in fair value of derivative liabilities
|
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|
(52
|
)
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|
38
|
|
Total
other expense, net
|
|
|
(469
|
)
|
|
|
(290
|
)
|
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|
|
|
|
|
|
|
|
Income before
provision for income taxes
|
|
|
737
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
300
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
437
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
334
|
|
|
|
126
|
|
Total
comprehensive income
|
|
$
|
771
|
|
|
$
|
206
|
|
Income per
share attributed to common stockholders: basic and diluted
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
$0.01
|
|
|
$
|
-
|
|
Diluted
|
|
$
|
$0.01
|
|
|
$
|
-
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
85,712,429
|
|
|
|
83,496,491
|
|
Diluted
|
|
|
85,712,429
|
|
|
|
83,496,491
|
|
|
|
|
|
|
|
|
|
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
MAM
SOFTWARE GROUP, INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
thousands)
|
|
For the three
months ended
September 30,
2010
|
|
|
For the three
months ended
September 30,
2009
|
|
Cash
flows from operating activities :
|
|
|
|
|
|
|
Net
income
|
|
$
|
437
|
|
|
$
|
80
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
22
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
268
|
|
|
|
282
|
|
Debt
discount and debt issuance cost amortization
|
|
|
57
|
|
|
|
120
|
|
Gain
on settlement of liability
|
|
|
-
|
|
|
|
(50
|
)
|
Deferred
income taxes
|
|
|
(132
|
)
|
|
|
(34
|
)
|
Change
in fair value of derivative liabilities
|
|
|
52
|
|
|
|
(38
|
)
|
Fair
value of stock issued for services
|
|
|
80
|
|
|
|
20
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(385
|
)
|
|
|
(1,101
|
)
|
Inventories
|
|
|
85
|
|
|
|
(42
|
)
|
Prepaid
expenses and other assets
|
|
|
(252
|
)
|
|
|
72
|
|
Accounts
payable
|
|
|
(391
|
)
|
|
|
570
|
|
Payroll
and other taxes payable
|
|
|
(54
|
)
|
|
|
(84
|
)
|
Deferred
revenue
|
|
|
(371
|
)
|
|
|
(292
|
)
|
Accrued
expenses and other liabilities
|
|
|
907
|
|
|
|
(604
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
323
|
|
|
|
(1,101
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities :
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(5
|
)
|
|
|
(32
|
)
|
Capitalized
software development costs
|
|
|
(14
|
)
|
|
|
(32
|
)
|
Net
cash used in investing activities
|
|
|
(19
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from financing activities :
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(676
|
)
|
|
|
(109
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(676
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
23
|
|
|
|
440
|
|
Net
decrease in cash and cash equivalents
|
|
|
(349
|
)
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,196
|
|
|
|
1,663
|
|
Cash
and cash equivalents at end of period
|
|
$
|
847
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
Condensed Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
(In
thousands)
|
|
For the three
months ended
September 30,
2010
|
|
|
For the three
months ended
September 30,
2009
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
Cash
paid during the period for :
|
|
|
|
|
|
|
Interest
|
|
$
|
286
|
|
|
$
|
205
|
|
Income
taxes
|
|
$
|
285
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect to debt discount to due an adoption of accounting
standard
|
|
$
|
-
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect to retained earnings due to an adoption of accounting
standard
|
|
$
|
-
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect to additional paid-in-capital due to an adoption of accounting
standard
|
|
$
|
-
|
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
NOTE
1. MANAGEMENT’S REPRESENTATIONS
The
condensed consolidated financial statements included herein have been prepared
by MAM Software Group, Inc., formerly known as Aftersoft Group, Inc. (“MAM” or
the “Company”), without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”). Certain information normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America has been omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating
results for the three months ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2011. It is suggested that the condensed consolidated financial statements
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended June 30, 2010, which was filed with the SEC on September 15,
2010. The Company has evaluated subsequent events through the
filing date of this Quarterly Report on Form 10-Q, and determined that no
subsequent events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the notes thereto, other than
as disclosed in the accompanying notes.
NOTE
2. BASIS OF PRESENTATION
MAM is a
former subsidiary of Auto Data Network, Inc. (“ADNW”), a publicly traded
company, the stock of which is currently traded on the pink sheets under the
symbol ADNW.PK. On November 24, 2008, ADNW distributed a dividend of the
71,250,000 shares of MAM common stock that ADNW owned at such time in order to
complete the previously announced spin-off of MAM’s businesses.
MAM is a
leading provider of business and supply chain management content and e-commerce
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through wholly owned
subsidiaries with operations in Europe and North America. MAM Software Ltd.
(“MAM Ltd.”) is based in Barnsley, United Kingdom (“U.K.”) and Aftersoft
Network, NA, Inc., (“ASNA”) has offices in the United States (“U.S.”) in Dana
Point, California and Allentown, Pennsylvania.
Principles
of Consolidation
The
condensed consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in the condensed consolidated
financial statements.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
Reclassifications
Certain
amounts in the June 30, 2010 consolidated financial statements have been
reclassified to conform to the current year presentations.
Concentrations
of Credit Risk
The
Company has no significant off-balance-sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
The
Company maintains cash balances at financial institutions that are insured by
the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September
30, 2010 and June 30, 2010, the Company did not have balances in these accounts
in excess of the FDIC insurance limits. For banks outside of the United States,
the Company maintains its cash accounts at financial institutions which it
believes to be credit worthy.
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents to the extent the funds are not
being held for investment purposes.
Customers
The
Company performs periodic evaluations of its customers and maintains allowances
for potential credit losses as deemed necessary. The Company generally does not
require collateral to secure its accounts receivable. Credit risk is managed by
discontinuing sales to customers who are delinquent. The Company estimates
credit losses and returns based on management’s evaluation of historical
experience and current industry trends. Although the Company expects to collect
amounts due, actual collections may differ from the estimated
amounts.
No
customer accounted for more than 10% of the Company’s accounts receivable at
September 30, 2010 and June 30, 2010 or revenues during the three month periods
ended September 30, 2010 and 2009.
Segment
Reporting
The
Company operates in one reportable segment. The Company evaluates
financial performance on a Company-wide basis.
Geographic
Concentrations
The
Company conducts business in the U.S., Canada and the U.K. For customers
headquartered in their respective countries, the Company derived 21% of its
revenues from the U.S., 3% from Canada and 76% from its U.K. operations during
the three months ended September 30, 2010, compared to 28% from the U.S., 1%
from Canada and 71% from the U.K. for the three months ended September 30, 2009.
At September 30, 2010, the Company maintained 64% of its net property and
equipment in the U.K. and the remaining 36% in the U.S.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
At June
30, 2010, the Company maintained 62% of its net property and equipment in the
U.K. with the remaining 38% in the U.S.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates made by the Company’s management include, but are not
limited to, the collectability of accounts receivable, the realizability of
inventories, the fair value of investments in available-for-sale securities, the
recoverability of goodwill and other long-lived assets, valuation of deferred
tax assets, the valuation of derivative liabilities, and the estimated value of
warrants and shares issued for non-cash consideration. Actual results could
materially differ from those estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash and cash
equivalents, investments in available-for-sale securities, accounts receivable,
accounts payable, accrued expenses and debt instruments.
Financial
assets and liabilities that are remeasured and reported at fair value at each
reporting period are classified and disclosed in one of the following three
categories:
|
-
|
Level
1 – Fair value based on quoted prices in active markets for identical
assets or liabilities.
|
|
-
|
Level
2 – Fair value based on significant directly observable data (other than
Level 1 quoted prices) or significant indirectly observable data through
corroboration with observable market data. Inputs would normally be (i)
quoted prices in active markets for similar assets or liabilities, (ii)
quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by
observable market data.
|
|
-
|
Level
3 – Fair value based on prices or valuation techniques that require
significant unobservable data inputs. Inputs would normally be a reporting
entity’s own data and judgments about assumptions that market participants
would use in pricing the asset or
liability.
|
Available-for-Sale
Securities
Management
determines the appropriate classification of its investments in equity
securities with readily determinable fair values that are not accounted for
under the equity method of accounting at the time of purchase and re-evaluates
such classification as of each balance sheet date. The specific identification
method is used to determine the cost basis of securities disposed of. Unrealized
gains and losses on the marketable securities are included as a separate
component of accumulated other comprehensive income (loss), net of tax. At
September 30, 2010 and June 30, 2010, investments consist of corporate stock
with a carrying value of $0. During the year ended June 30, 2009 the
Company wrote down its investment in available-for-sale securities to $0, which
is now the Company’s new cost basis in the securities. The Company
will not recognize any gain or loss on the securities unless they are
sold.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
Inventories
Inventories
are stated at the lower of cost or current estimated market value. Cost is
determined using the first-in, first-out method. Inventories consist primarily
of hardware that will be sold to customers. The Company periodically reviews its
inventories and records a provision for excess and obsolete inventories based
primarily on the Company’s estimated forecast of product demand and production
requirements. Once established, write-downs of inventories are considered
permanent adjustments to the cost basis of the obsolete or excess
inventories.
Property
and Equipment
Property
and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in the condensed consolidated statement of
operations. Depreciation and amortization expense was $46,000 and $50,000 for
the three months ended September 30, 2010 and 2009, respectively.
Software
Development Costs
Costs
incurred to develop computer software products to be sold or otherwise marketed
are charged to expense until technological feasibility of the product has been
established. Once technological feasibility has been established, computer
software development costs (consisting primarily of internal labor costs) are
capitalized and reported at the lower of amortized cost or estimated realizable
value. Purchased software development cost is recorded at its estimated fair
market value. When a product is ready for general release, its capitalized costs
are amortized on a product-by-product basis. The annual amortization is the
greater of: the ratio that current gross revenue for a product bear to the total
of current and anticipated future gross revenues for that product: and, the
straight-line method over the remaining estimated economic life (a period of
three years) of the product including the period being reported on. If the
future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact the recorded loss of the Company. Amortization expense was
$44,000 and $51,000 for the three months ended September 30, 2010 and 2009,
respectively.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
Amortizable
Intangible Assets
Amortizable
intangible assets consist of completed software technology, customer
relationships and automotive data services and are recorded at cost. Completed
software technology and customer relationships are amortized using the
straight-line method over their estimated useful lives of 8 to 10 years, and
automotive data services are amortized using the straight-line method over their
estimated useful lives of 20 years. Amortization expense on amortizable
intangible assets was $178,000 and $181,000 for the three months ended September
30, 2010 and 2009, respectively.
Goodwill
Goodwill
and intangible assets that have indefinite useful lives are not to be amortized
but rather are tested at least annually for impairment.
Goodwill
is subject to impairment reviews by applying a fair-value-based test at the
reporting unit level, which generally represents operations one level below the
segments reported by the Company. As of September 30, 2010, the Company does not
believe there is an impairment of its goodwill. There can be no assurance,
however, that market conditions will not change or demand for the Company’s
products and services will continue which could result in additional impairment
of goodwill in the future.
For the
three months ended September 30, 2010, goodwill activity was as
follows:
|
|
$
|
8,924,000
|
|
Effect
of exchange rate changes
|
|
|
318,000
|
|
Balance,
September 30, 2010
|
|
$
|
9,242,000
|
|
Long-Lived
Assets
The
Company’s management assesses the recoverability of long-lived assets (other
than goodwill discussed above) upon the occurrence of a triggering event by
determining whether the carrying value of the long-lived asset can be
recovered through projected undiscounted future cash flows over its remaining
life. The amount of long-lived asset impairment, if any, is measured based on
fair value and is charged to operations in the period in which long-lived asset
impairment is determined by management. At September 30, 2010, management
believes there is no impairment of its long-lived assets. There can be no
assurance, however, that market conditions will not change or demand for the
Company’s products and services will continue, which could result in impairment
of long-lived assets in the future.
Issuance
of Stock to Non-Employees for Non-Cash Consideration
All
issuances of the Company’s equity instruments to non-employees have been
assigned a per share amount equaling either the market value of the equity
instruments issued or the value of consideration received, whichever
is more readily determinable. The majority of the non-cash consideration
received pertains to services rendered by consultants and others and has been
valued at the market value of the equity instruments on the dates
issued.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
The
measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement. An asset acquired in exchange for the
issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet
once the equity instrument is granted for accounting purposes.
Stock-Based
Compensation
For
valuing stock options awards, the Company has elected to use the Black-Scholes
Merton valuation model. For the expected term, the Company has
historically used a simple average of the vesting period and the contractual
term of the option. Volatility is a measure of the amount by which the Company’s
stock price is expected to fluctuate during the expected term of the option. For
volatility the Company considers its own volatility as applicable for valuing
its options and warrants. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The risk-free interest rate is based on
the relevant U.S. Treasury Bill Rate at the time of each grant. The
dividend yield represents the dividend rate expected to be paid over the
option’s expected term; the Company currently has no plans to pay
dividends.
On June
12, 2008, the Company’s shareholders approved the MAM Software Group Inc. 2007
Long-Term Stock Incentive Plan (the “LTIP”). The maximum aggregate number of
shares of common stock that may be issued under the LTIP, including stock awards
and stock appreciation rights, is limited to 15% of the shares of common stock
outstanding on the first trading day of any fiscal year. The Company issued
restricted shares to management and board members in Fiscal 2010 and to
management and board members in Fiscal 2011 under this plan (see Note
7).
Revenue
Recognition
Software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectability is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met.
The
Company accounts for delivered elements in accordance with the selling price
when arrangements include multiple product components or other elements and
vendor-specific objective evidence exists for the value of all undelivered
elements. Revenues on undelivered elements are recognized once delivery is
complete.
In those
instances where arrangements include significant customization, contractual
milestones, acceptance criteria or other contingencies (which represents the
majority of the Company’s arrangements), the Company accounts for the
arrangements using contract accounting, as follows:
|
1)
|
When
customer acceptance can be estimated, expenditures are capitalized as work
in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
|
|
2)
|
When
customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is
obtained.
|
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
The
Company records amounts collected from customers in excess of recognizable
revenue as deferred revenue in the accompanying condensed consolidated balance
sheets.
Revenues
for maintenance agreements, software support, on-line services and information
products are recognized ratably over the term of the service
agreement.
The
Company expenses advertising costs as incurred. For the three months ended
September 30, 2010 and 2009, advertising expense totaled $19,000 and $28,000,
respectively.
Gain
on Extinguishment of Liability for Services
The
Company had realized $50,000 of income from a settlement with a creditor for the
three months ended September 30, 2009, which is included in Other
Income.
Foreign
Currency
Management
has determined that the functional currency of its subsidiaries is the local
currency. Assets and liabilities of the U.K. subsidiaries are translated into
U.S. dollars at the quarter-end exchange rates. Income and expenses are
translated at an average exchange rate for the period and the resulting
translation gain adjustments are accumulated as a separate component of
stockholders’ equity. The translation gain adjustment totaled $334,000 and
$126,000 for the three months ended September 30, 2010 and 2009,
respectively.
Foreign
currency gains and losses from transactions denominated in other than respective
local currencies are included in income. The Company had no foreign currency
transaction gains (losses) for all periods presented.
Comprehensive
Income
Comprehensive
income includes all changes in equity (net assets) during a period from
non-owner sources. For the three months ended September 30, 2010 and 2009, the
components of comprehensive income consist of changes in foreign currency
translation gains.
MAM
SOFTWARE GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
(Unaudited)
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the enactment occurs.
Deferred taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The Company's
practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company had no accrual for interest or penalties on
the Company's consolidated balance sheets at September 30, 2010 and June 30,
2010, and has not recognized interest and/or penalties in the consolidated
statements of income for the three months ended September 30, 2010.
Basic
and Diluted Earnings (Loss) Per Share
Basic
earnings (loss) per common share are computed based on the weighted average
number of shares outstanding for the period. Diluted earnings (loss) per share
includes the effect of potential shares outstanding including dilutive stock
options and warrants, using the treasury stock method and shares issuable upon
conversion of debt. During periods in which the Company incurs losses, common
stock equivalents, if any, are not considered, as their effect would be
anti-dilutive. For the three months ended September 30, 2010, there
were no dilutive shares and a total of 10,845,834 common stock purchase warrants
and debt convertible into 2,257,745 shares were excluded from the computation of
diluted loss per share as their effect would have been anti-dilutive. For the
three months ended September 30, 2009 a total of 21,798,135 common stock
purchase warrants and debt convertible into 3,361,345 shares were excluded from
the computation of diluted loss per share as their effect would have been
anti-dilutive.
Derivative
Liabilities
The
Company adopted the accounting standard that provides guidance for determining
whether an equity-linked financial instrument, or embedded feature, is indexed
to an entity’s own stock. The standard applies to any
freestanding financial instruments or embedded features that have
the characteristics of a derivative, and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of the adoption, 5,083,333 of the Company’s issued and outstanding common
stock purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment. These warrants
have an average exercise price of $0.21 and expiration dates of December 31,
2013. In addition, amounts related to the embedded conversion feature of
convertible notes issued previously treated as equity pursuant to the derivative
treatment exemption were also no longer afforded equity treatment. As such,
effective July 1, 2009, the Company reclassified the fair value of these common
stock purchase warrants and recorded the fair value of the embedded conversion
features, which both have exercise price reset features, from equity to
liability status as if these warrants and embedded conversion features were
treated as a derivative liability since the earliest date of issue in December
2007. On July 1, 2009, the Company reclassified from additional paid-in
capital, as a cumulative effect adjustment, approximately $868,000 to derivative
liabilities, increased the debt discount and derivative liabilities by a gross
amount of approximately $310,000, decreased accumulated deficit by approximately
$619,000 for the change in fair value of derivative liabilities for the period
from December 2007 through June 30, 2009 and increased accumulated deficit by
approximately $158,000 for additional amortization of debt discount for the
period from December 2007 through June 30, 2009. The fair value of the common
stock purchase warrants was $343,000 and the embedded conversion feature was $0
on September 30, 2010. The fair value of the common stock purchase
warrants was $291,000 and the embedded conversion feature was $0 on June 30,
2010. The total value of these derivative liabilities decreased from
$559,000 to $521,000 for the period ended September 30, 2009. As such,
the Company recognized approximately $38,000 of gain from the change in
fair value of the derivative liabilities for the three months ended
September 30, 2010.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
All
future changes in the fair value of these warrants and embedded conversion
features will be recognized in earnings until such time as the warrants are
exercised or expire and the debt is converted to common stock or repaid. These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimates the fair value of these warrants using the
Black-Scholes Merton option pricing model using the following
assumptions:
|
|
September
30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
Annual
dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Average
expected life (years)
|
|
|
0.17
- 3.25
|
|
|
|
0.42 – 3.50
|
|
Risk-free
interest rate
|
|
|
0.16%-0.63
|
%
|
|
|
0.39%-2.65
|
%
|
Expected
volatility
|
|
|
87%-149
|
%
|
|
|
82%
- 137
|
%
|
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using weekly pricing observations for recent periods. The Company
believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants. The Company currently has no reason to believe future volatility over
the expected remaining life of these warrants is likely to differ materially
from historical volatility. The expected life is based on the remaining term of
the warrants. The risk-free rate is based on the U.S. Treasury rate that
corresponds to the expected term of the warrants and conversion
feature.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Fair
value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
343,000
|
|
|
$
|
343,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
343,000
|
|
|
$
|
343,000
|
|
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
The
following table details the approximate fair value measurements within the fair
value hierarchy of the Company’s derivative liabilities using Level 3
Inputs:
Balance
as of June 30, 2010
|
|
$
|
291,000
|
|
Change
in fair value
|
|
|
52,000
|
|
Balance
as of September 30, 2010
|
|
$
|
343,000
|
|
The
Company has no assets that are measured at fair value on a recurring basis.
There were no assets or liabilities measured at fair value on a non-recurring
basis during the three months ended September 30, 2010.
NOTE 3. TRANSACTIONS WITH FORMER PARENT
COMPANY
On
November 24, 2008, ADNW distributed a dividend of the 71,250,000 shares of the
Company’s common stock that ADNW owned at such time in order to complete the
spin-off of then-Aftersoft’s businesses. The dividend shares were distributed in
the form of a pro rata dividend to the holders of record as of November 17, 2008
(the “Record Date”) of ADNW’s common and convertible preferred stock. Each
holder of record of shares of ADNW common and preferred stock as of the close of
business on the Record Date was entitled to receive 0.6864782 shares of the
Company’s common stock for each share of common stock of ADNW held at such time,
and/or for each share of ADNW common stock that such holder would own,
assuming the convertible preferred stock owned on the Record Date was
converted in full. Prior to the spin-off, ADNW owned approximately
77% of the Company’s issued and outstanding common stock. Subsequent to and as a
result of the spin-off, the Company is no longer a subsidiary of
ADNW.
ADNW
attempted to settle an old outstanding obligation of ADNW of $775,000 with Mr.
Arthur Blumenthal (see Note 6) for 4,400,000 shares of ADNW common stock. The
value of the shares declined and Mr. Blumenthal elected not to accept the ADNW
shares as full compensation, and later demanded that the Company settle ADNW’s
liability with additional or different consideration. In April 2008, the Company
accepted the 4,400,000 shares from ADNW valued at $484,000 in exchange for
attempting to settle ADNW’s liability. The difference between the value of the
ADNW shares and the amount of ADNW’s initial obligation of $291,000 was recorded
as general and administrative expense in the consolidated statement of
operations during such period. In February 2010, Mr. Blumenthal
commenced a civil action against the Company and on April 2010, a settlement
agreement was entered into with respect to such civil action (See Note
6).
During
the year ended June 30, 2009, the Company liquidated 5,231,622 common shares of
ADNW for net proceeds of $842,000, and issued 2,000,000 common shares of ADNW in
settlement of ADNW obligations. As a result of the Company’s ownership of
certain ADNW securities, the Company received approximately 13,965,295 shares of
its own common stock in connection with the spin-off dividend
distribution. On December 31, 2008, the Company retired 13,722,112 of
the shares. The remaining 243,183 shares were used by the Company for rounding
of fractional shares issued in respect of the spin-off dividend, to make
adjustments for the benefit of the holders of ADNW’s Series B Convertible
Preferred Stock which received fewer shares in connection with the spin-off than
the number to which they were entitled as a result of a calculation error
relating to the Series B conversion rate, and for other minor
adjustments.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
As a
result of the above transactions, the Company no longer owns any shares of ADNW
stock as of September 30, 2010.
NOTE 4. INVESTMENT IN AVAILABLE -FOR-SALE
SECURITIES
The
Company received a total of 4,433,284 shares of First London PLC (formerly First
London Securities), from the sale of EXP Dealer Software Limited ("EXP"). The
shares had been listed for trading on the London Plus Exchange but effective
September 30, 2009, the shares were delisted.
Because
trading in the shares of First London PLC has been halted, the Company
determined that it no longer could value the securities using Level 2, but
required a Level 3 classification. Fair value measurements using Level 3 inputs
in the table above relate to the Company's investments in available-for-sale
securities, which are based on the Company's inability to obtain current
financial statements and the fact that trading in the shares of First London PLC
has been halted.
NOTE 5. LONG -TERM DEBT
Long-term
debt consists of the following as of September 30, 2010 and June 30,
2010:
|
|
September
30,
2010
|
|
|
June 30,
2010
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ComVest
term loan, net of debt discount of $21,000 and $71,000
|
|
$
|
3,312,000
|
|
|
$
|
3,912,000
|
|
ComVest
revolver
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Secured
notes
|
|
|
235,000
|
|
|
|
243,000
|
|
Other
notes
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
|
4,560,000
|
|
|
|
5,168,000
|
|
Less
current portion (a)
|
|
|
(3,042,000
|
)
|
|
|
(5,000,000
|
)
|
Long
term portion
|
|
$
|
1,518,000
|
|
|
$
|
168,000
|
|
|
(a)
|
The
Company has classified $1,362,000 of the ComVest debt that was repaid in
October 2010 as non-current, as this is the amount of the ComVest debt
that was refinanced with the $2,076,000 term loan from HSBC Bank plc to
long term debt, net of current portion based on the repayment terms (see
Note 8) and does not become due until after September 30,
2011.
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ComVest
Loan Agreement
On
December 21, 2007, the Company entered into a Revolving Credit and
Term Loan Agreement (the “Loan Agreement”) with ComVest Capital LLC (“ComVest”),
as lender, pursuant to which ComVest agreed to extend a $1,000,000 secured
revolving Credit Facility and a $5,000,000 Term Loan. The Loan Agreement
contains customary affirmative and negative covenants, including maximum limits
for capital expenditures per fiscal year, and ratios for liquidity. In
connection with obtaining a waiver for a violation of loan covenants at March
31, 2008, the Company reduced the exercise price from $0.3125 per share to $0.11
per share for one million warrants held by ComVest (see below), recognizing the
incremental fair value of the modified warrants of $24,000 as additional
interest expense.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
As of
June 30, 2008, in connection with obtaining a waiver for a violation of loan
covenants, the Company and ComVest amended the Loan Agreement and modified
certain covenants. The cash flow ratio coverage was reduced and the lender
agreed to extend from January 1, 2009 until January 1, 2010 the start of the
loan amortization. As part of the amendment, ComVest required the Company to
reduce the exercise price from $0.39 to $0.11 for 2,000,000 warrants held by
ComVest (see below). The incremental fair value of the modified warrants is
$15,000, which was recorded as an additional debt discount and is being
amortized over the remaining life of the term loan. As of December
31, 2008, in connection with obtaining a waiver for violation of certain
loan covenants, the Company and ComVest agreed to increase the interest on the
$1,000,000 Credit Facility (described below) from 9.5% to 11%. The amendment did
not meet the requirements of a Modification or Exchange of Debt
Instruments, therefore no adjustment to the financial statements was
required. Pursuant to a waiver and amendment, the annual interest rate was
restored to 9.5% as the Company became compliant with the covenant as of the
close of the quarter ending on March 31, 2009.
As of
March 31, 2010, the Company did not meet the required ratio of (a) Earnings
Before Interest, Depreciation, and Amortization, minus capital expenditures
incurred to (b) debt service (all interest and principal payments) (“Debt
Service”) (the “EBIDA Ratio”) of 1.25:1as required by the amended Loan
Agreement. The Company’s failure to maintain this ratio constitutes an
event of default under the terms of the Loan Agreement. Under the terms of the
Loan Agreement, if any event of default occurs, the full principal amount of the
Note, together with interest and other amounts owing in respect thereof, to the
date of acceleration shall become, at ComVest’s election, immediately due and
payable in cash. On June 2, 2010, the Company paid ComVest a
Forbearance Fee of $25,000 to waive the default until June 20, 2010 and on June
17, 2010 ComVest raised the interest rate from 9.5% to 13.5%, for the Revolving
Credit Note and from 11% to 16% for the Term Note.
As of
June 30, 2010, the Company did not meet the required EBIDA Ratio of
1.25:1 as required by the amended Loan Agreement. The Company’s failure to
maintain this ratio constitutes an event of default under the terms of the Loan
Agreement. Under the terms of the Loan Agreement, if any event of default
occurs, the full principal amount of the Note, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall become, at
ComVest’s election, immediately due and payable in cash. On September 8, 2010,
the Company entered into a “Forbearance Agreement” with
ComVest. Under the Forbearance Agreement ComVest agreed to forbear
the exercise of its rights and remedies under the Loan Agreement until November
30, 2010. The Company made a nonrefundable payment to ComVest of
$50,000 upon the execution and delivery of the fee and agreed to make an
additional payment of $75,000 by the earlier of November 30, 2010 or the
Company’s payment in full of its obligation to ComVest. The
above-mentioned fees are included in interest expense in the condensed
consolidated statement of income as of September 30, 2010.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
Credit Facility and Revolving Credit
Note. Pursuant to the terms of the Loan Agreement, the Credit Facility
became available on December 21, 2007 (the “Closing Date”), and the initial
maturity date was November 30, 2009. The Company had the option of
extending the maturity date of the Credit Facility for one additional year,
through November 30, 2010 upon written notice to ComVest provided that no
default or event of default had occurred and was continuing at that time, and
provided that the maturity date of the Credit Facility had not been accelerated
due to prepayment in full of the Term Loan. On September 9, 2009 the
Company notified ComVest of its election to extend the maturity date of the
credit facility to November 30, 2010.
The
Credit Facility provides for borrowing capacity of an amount up to (at any time
outstanding) the lesser of the borrowing base at the time of each advance under
the Credit Facility, or $1,000,000. The borrowing base at any time is an amount
determined in accordance with a borrowing base report the Company is required to
provide to ComVest, based upon the Company’s Eligible Accounts and Eligible
Inventory, as such terms are defined in the Loan Agreement.
In
connection with the Credit Facility, the Company issued a Revolving Credit Note
(the “Credit Note”) payable to ComVest in the principal amount of $1,000,000,
bearing interest at a rate per annum equal to the greater of (a) the prime rate,
as announced by Citibank, N.A. from time to time, plus two percent (2%), or (b)
nine and one-half percent (9.5%). The interest rate, which was 9.5% from the
Closing Date through December 31, 2008, had been increased from 9.5% to 11% in
connection with obtaining a waiver from ComVest for violation of certain loan
covenants as described above. As of April 1, 2009, the
Company had regained compliance with the loan covenants and the interest rate
was reduced from 11% back to 9.5%. The applicable interest rate will be
increased by four hundred (400) basis points during the continuance of any event
of default under the Loan Agreement. Interest is computed on the daily unpaid
principal balance and is payable monthly in arrears on the first day of each
calendar month commencing January 1, 2008. Interest is also payable upon
maturity or acceleration of the Credit Note.
The
Company has the right to prepay all or a portion of the principal balance on the
Credit Note at any time, upon written notice, with no penalty. The Credit Note
is secured pursuant to the provisions of certain Security
Documents.
The
Company also has the option to terminate the Credit Facility at any time upon
five business days’ prior written notice, and upon payment to ComVest of all
outstanding principal and accrued interest of the advances on the Credit
Facility, and prorated accrued commitment fees. The Credit Facility commitment
also terminates, and all obligations become immediately due and payable, upon
the consummation of a Sale, which is defined in the Loan Agreement as certain
changes of control or sale or transfers of a material portion of the Company’s
assets.
At
September 30, 2010, the Company had drawn down the $1,000,000 Credit Facility in
full. The interest rate as of September 30, 2010 was
13.5%.
Term Loan and Convertible Term Note.
Pursuant to the terms of the Loan Agreement, ComVest extended to the
Company a Term Loan in the principal amount of $5,000,000, on the Closing Date.
The Term Loan is a one-time loan, and unlike the Credit Facility, the principal
amount is not available for re-borrowing.
MAM
SOFTWARE GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
(Unaudited)
The Term
Loan is evidenced by a Convertible Term Note (the “Term Note”) issued by the
Company on the Closing Date, and payable to ComVest in the principal amount of
$5,000,000. The Term Note bears interest at a rate of eleven percent (11%) per
annum, except that during the continuance of any event of default, the
interest rate was increased to sixteen percent (16%).
As
amended (see ”ComVest Loan Agreement” above), the Term Note is repayable in 11
equal monthly installments of approximately $208,333, payable on first day of
each calendar month commencing January 1, 2010 through November 1, 2010, with
the balance of $2,916,667 due on November 30, 2010. The Company has
the option to prepay the principal balance of the Term Note in whole or in part,
at any time, upon 15 days’ prior written notice. The Company will be required to
prepay the Term Loan in whole or part under certain circumstances. In the event
that the Company prepays all or a portion of the Term Loan, the Company will
ordinarily pay a prepayment premium in an amount equal to (i) three percent (3%)
of the principal amount being prepaid if such prepayment is made or is required
to be made on or prior to the second anniversary of the Closing Date, and (ii)
one percent (1%) of the principal amount being prepaid if such prepayment is
made or is required to be made subsequent to the second anniversary of the
Closing Date.
The
principal and interest payable on the Term Note is convertible into shares of
the Company’s common stock at the option of ComVest. In addition, the
Company may require conversion of the principal and interest under certain
circumstances. The initial conversion price was $1.50 per
share. The number of shares issuable upon conversion of the
Term Note (the “Conversion Shares”), and/or the conversion price, may be
proportionately adjusted in the event of any stock dividend, distribution, stock
split, stock combination, stock consolidation, recapitalization or
reclassification or similar transaction. In addition, the number of Conversion
Shares, and/or the conversion price may be adjusted in the event of certain
sales or issuances of shares of the Company’s common stock, or securities
entitling any person to acquire shares of common stock, at any time while
the Term Note is outstanding, at an effective price per share which is less than
the then-effective conversion price of the Term Note.
The
conversion price for the Term Note was $1.50 and subsequently was reduced to
$1.45, as a result of certain anti-dilution protection contained therein
following the issuance by the Company of additional shares of common stock and
common stock equivalents.
The
Company incurred a closing fee of $100,000 in connection with the Term Loan. In
connection with the Credit Facility, the Company has agreed to pay an annual
commitment fee of $15,000, on December 1 of each year, commencing December 1,
2008, and on any termination date (pro-rated, if applicable), that the Credit
Facility is in effect, as well as a collateral monitoring and administrative fee
of $1,500 per month.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
The
expenses of the Loan Agreement were approximately $641,000, which included a
finder’s fee of $300,000, lender fees of $190,000 and professional and due
diligence fees of approximately $151,000. The net proceeds to the Company were
approximately $4,359,000. The fees were allocated between debt issuance costs
and debt discount. The debt issuance costs of $478,000 were recorded on the date
of entering into the agreement in other assets in the accompanying consolidated
balance sheets and are being amortized and charged to interest expense over the
term of the loan using the effective interest method. The balance of the debt
issuance costs was approximately $0 as of September 30, 2010. A debt discount of
$163,000 was recorded in the consolidated balance sheet on the date of entering
into the agreement as a reduction in the carrying value of the debt, and is
being amortized and charged to interest expense over the term of the loan using
the effective interest method. The Company also issued warrants to ComVest to
purchase shares of the Company’s Common Stock (see below). The relative fair
value of these warrants was approximately $868,000 and is recorded in the debt
discount. Additionally, due to the adoption of the accounting standard that
provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock, effective July 1,
2009, the Company recorded an additional $310,000 of debt discount as if
incurred on the date of the agreement (see Note 2). The balance of
the debt discount is approximately $21,000 as of September 30,
2010.
Warrants. In connection with
the Loan Agreement, the Company issued warrants to ComVest to purchase the
following amounts of shares of the Company’s Common Stock, exercisable after the
Closing Date and expiring December 31, 2013: a) Warrant to purchase 1,000,000
shares of common stock at an exercise price of $0.3125 per share; b) Warrant to
purchase 2,000,000 shares of common stock at an exercise price of $0.39 per
share; and c) Warrant to purchase 2,083,333 shares of common stock at an
exercise price of $0.3625 per share; (each, a “Warrant”) (the 5,083,333 shares
collectively issuable upon exercise of the Warrants are referred to herein as
the “Warrant Shares”). The exercise prices of certain of these
warrants were amended, as described under “ComVest Loan Agreement” above. The relative fair value
of the Warrant Shares is $868,000 using a Black Scholes valuation model and also
contains a cashless exercise feature. The warrant valuation was
computed using a 3.5% risk-free interest rate, a 99% volatility and a six-year
life. The value of the Warrant Shares is included in debt discount, is recorded
in the consolidated balance sheet as a reduction in the carrying value of the
debt, and is being amortized and charged to interest expense over the term of
the loan using the effective interest method.
The
number of shares issuable upon exercise of the Warrants, and/or the applicable
exercise prices, may be proportionately adjusted in the event of any stock
dividend, distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar transaction. In addition, the
number of shares issuable upon exercise of the Warrant Shares, and/or the
applicable exercise prices may be adjusted in the event of certain issuances of
shares of the Company’s common stock, or securities entitling any person to
acquire shares of common stock, at any time while the Warrants are outstanding,
at an effective price per share which is less than the then-effective exercise
prices of the Warrants. Subsequently, the exercise price of the warrants were
reduced as a result of certain anti-dilution protection contained therein
following the issuance by the Company of additional shares of common stock and
common stock equivalents.
The
Company also granted certain registration rights and piggyback registration
rights to the holder(s) of the securities underlying the Term Note and
Warrants. The registration for the sales of the securities underlying
the Term Note and Warrants was declared effective by the Securities and Exchange
Commission on May 1, 2009.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
The
Company issued warrants to purchase 250,000 shares of common stock as
compensation to a consultant for assistance in securing the $5,000,000 Term
Loan. The warrants were valued at $42,000 using a Black-Scholes valuation model
and are included in debt issuance cost. The warrant valuation was computed using
a 3.5% risk free interest rate, a 99% volatility and a six-year
life.
Amortization
of debt discount was approximately $50,000 and amortization of debt issuance
costs was approximately $7,000 for the three months ended September 30, 2010.
Amortization of debt discount was $69,000 and amortization of debt issuance
costs was $51,000 for the three months ended September 30, 2009. The
unamortized debt discount related to the debt issuance costs, the warrants and
the conversion feature was $0, $6, and $15,000, respectively.
The
ComVest Term Loan and Revolving Credit Facility were repaid on October 26. 2010.
See Note 8.
Secured
Notes
The
Company has secured notes totaling $235,000 payable over 9 to 45 months with
monthly payments of $4,340 and quarterly payments of $6,586 which will mature in
2014. The notes bear interest rates of 5.49% to 9.54% and are secured
by leasehold improvements and equipment with a carrying value of
$340,000.
NOTE 6. COMMITMENTS AND
CONTINGENCIES
Legal
Matters
From time
to time, the Company is subject to various legal claims and proceedings arising
in the ordinary course of business. The ultimate disposition of these
proceedings could have a material adverse effect on the consolidated financial
position or results of operations of the Company.
On
February 17, 2010, Mr. Arthur Blumenthal, a former shareholder of Anderson BDG,
Inc., commenced a civil action against the Company, certain subsidiaries,
and current and former officers and directors of the Company. The
Company had previously recorded a liability for $817,000 and recorded an
additional expense of $513,000 in the quarter ending March 31, 2010. On April
16, 2010, the Company settled the litigation with Mr. Blumenthal for $1,250,000.
On April 19, 2010, the Company paid Mr. Blumenthal $350,000 as partial payment
of the settlement amount. The balance of the settlement amount is
payable through November 2012 in equal monthly payments of $31,750, which
includes interest at 7%. In the event the Company defaults in payment, Mr.
Blumenthal may elect to reinstitute the original litigation. Of the remaining
balance due Blumenthal of $772,000, $332,000 is included in the “Current portion
of settlement liability” and $440,000 is included “Settlement liability, net of
current portion” in the accompanying condensed consolidated financial statements
ending September 30, 2010.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
Indemnities
and Guarantees
The
Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities.
In connection with its customers’ contracts the Company indemnifies
the customer that the software provided does not violate any U.S. patent. The
duration of the guarantees and indemnities varies, and is generally tied to the
life of the agreement. These guarantees and indemnities do not provide for any
limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated nor incurred
any payments for these obligations and, therefore, no liabilities have been
recorded for these indemnities and guarantees in the accompanying condensed
consolidated balance sheets.
The
Company has agreed to indemnify ComVest and its directors, officers, employees,
attorneys and agents against, and to hold ComVest and such persons harmless
from, any and all losses, claims, damages and liabilities and related expenses,
including reasonable counsel fees and expenses, they may incur, arising out of,
related to, or as a result of, certain transactions or events in connection with
the Credit Facility and Term Loan (see Note 5).
NOTE 7. STOCKHOLDERS’
EQUITY
During
the quarter ended September 30, 2008, the Company approved the issuance of
483,000 shares to the non-management members of the Board of Directors under the
Company’s 2007 LTIP. The shares will be issued over a three year
period. On July 6, 2009, the Company issued 36,537 shares of common stock
to certain directors, which were valued at the $4,349. On April 6, 2010, the
Company issued 38,621 shares of these awards, which were valued at
$2,897. On July 7, 2010, the Company issued 41,654 shares of these awards,
which were valued at $3,332. The shares are valued at the market value of
the shares on the dates issued.
During
the quarter ended September 30, 2009, the Company approved the issuance of
1,156,818 shares of common stock to the non-management members of the Board of
Directors under the Company’s 2007 LTIP. The shares will be issued
over a three year period. On October 6, 2009, the Company issued
86,644 shares of these awards, which were valued at $8,664, based on the closing
market price of the Company’s common stock. On January 6, 2010, the
Company issued 78,144 shares of these awards, which were valued at $5,470, based
on the closing market price of the Company’s common stock. On April 6, 2010, the
Company issued 83,644 shares of these awards, which were valued at
$6,273. On July 7, 2010, the Company issued 85,038 shares of these
awards, which were valued at $6,803, based on the closing market price of the
Company’s common stock.
On July
6, 2010, the Company issued 214,844 shares of common stock to certain
directors in lieu of compensation, which were valued at approximately
$17,000, based on the closing market price of the Company’s common
stock.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
On July
13, 2010, the Compensation Committee of the Board of Directors approved
employment agreements, including a bonus plan, with each of Michael Jamieson,
our President and Chief Executive Officer, and Charles F. Trapp, our Executive
Vice President and Chief Financial Officer. Such employment
agreements and bonus plans were entered into as of July 1, 2010 (the “Effective
Date”), the first day of our 2011 fiscal year (see Note 8).
On July
16, 2010, the Company issued 655,769 shares of common stock to certain officers
in lieu of compensation, which were valued at approximately $52,000, based on
the closing price of the Company’s common stock.
On July
20, 2010, the Company entered into an agreement with certain warrant holders to
exchange 11,652,301 of their warrants for 1,792,662 shares of the Company's
Series A Preferred Stock. The agreement provides that the Series A Preferred
stock are contingently convertible into shares of the Company's common stock
only upon the approval of the Company's shareholders to amend the Company's
certificate of incorporation to increase the number of authorized shares. As of
the date of this filing, the Company's shareholders have not provided the
required approval.
During
the quarter ending September 30, 2010, the Company approved the issuance of
1,556,250 shares to the non-management members of the Board of Directors under
the Company’s 2007 LTIP. The shares vest over a three-year
period. No shares have been issued as of September 30, 2010 (see Note
8).
During
the quarter ending September 30, 2008, the Company approved the issuance of
563,000 shares of common stock to the non-management members of the Board of
Directors under the Company’s 2007 Long-Term Incentive Plan. The
shares vest over a three-year period. On October 8, 2010, the Company
issued 41,654 shares of common stock to certain directors, which were valued at
$3,499, the closing market price of the Company’s common stock.
During
the quarter ended September 30, 2009, the Company approved the issuance of
1,156,818 shares of common stock to the non-management members of the Board of
Directors under the Company’s 2007 LTIP. The shares vest over a
three-year period. On October 8, 2010, the Company issued 85,038
shares of common stock to certain directors, which were valued at $7,143, the
closing market price of the Company’s common stock.
During
the quarter ended September 30, 2010, the Company approved the issuance of
1,556,250 shares to the non-management members of the Board of
Directors under the Company’s 2007 LTIP. The shares vest over a
three-year period. On October 8, 2010, the Company issued
116,927 shares of common stock to certain directors, which were valued at the
closing market price of the Company’s common stock, $10,894.
On
October 8, 2010, the Company issued 190,972 shares of common stock to
certain directors in lieu of compensation, which were valued at
approximately $17,188 based on the closing market price of the Company’s
common stock.
MAM
SOFTWARE GROUP, INC.
September
30, 2010
(Unaudited)
On
October 8, 2010, the Company issued 100,000 shares of common stock to an
employee valued at $8,400, based on the closing market price of the Company’s
common stock.
On
October 15, 2010, the Company closed its Rights Offering and raised $3,330,000.
The Rights Offering allowed each shareholder to purchase 0.6 of a share of
common stock for $0.065 per share. A total of 51,516,111 shares of common stock
were sold.
On
October 26, 2010, the Company received a three year term loan from HSBC Bank plc
for £1,324,550, or approximately $2,076,000. The loan is repayable in British
Pounds at the rate of £38,760 per month including interest of 3.4%, or
approximately $62,000. The net proceeds were used to retire the remaining
balance of the ComVest Revolving Credit and Term Loan.
Some
of the statements contained in this Quarterly Report on Form 10-Q, which are not
purely historical, are forward-looking statements, including, but not limited
to, statements regarding the Company’s objectives, expectations, hopes, beliefs,
intentions or strategies regarding the future. In some cases, you can identify
forward-looking statements by the use of the words “may,” “will,” “should,”
“expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, our actual results could differ
materially from those disclosed in these statements due to various risk factors
and uncertainties affecting our business. We caution you not to place undue
reliance on these forward-looking statements. We do not assume responsibility
for the accuracy and completeness of the forward-looking statements and we do
not intend to update any of the forward-looking statements after the date of
this report to conform them to actual results. You should read the following
discussion in conjunction with our financial statements and related notes
included elsewhere in this report. For a more complete understanding of our
industry, the drivers of our business and our current period results, you should
read the following Management’s Discussion and Analysis of Financial Condition
and Results of Operation in conjunction with our Annual Report on Form 10-K for
the year ended June 30, 2010 and our other filings with the SEC.
Overview
MAM
Software Group, Inc. (“MAM” or the “Company”) is a technology holding company
that has two wholly owned subsidiaries based in the U.S., Aftersoft Network,
N.A., Inc. (“ASNA”) and MAM Software Inc. (“MAM Inc.”), and one in the U.K., MAM
Software Limited (“MAM Ltd.”), which operate independently from one another. We
have and continue to market and develop business management software solutions
that manage both the business and supply chain for small- and medium-sized firms
in the automotive aftermarket. The automotive aftermarket includes those
businesses that supply servicing, parts, oil, tires, and performance extras to
the retail market.
We
believe that the largest single issue facing the automotive aftermarket at this
time is the down turn of the global economy, especially the economies in which
we operate. The constraint of credit within the U.S. and U.K. markets is forcing
automobile owners to retain their existing automobiles far longer than they may
have previously planned. This phenomenon is forcing owners to seek out more
economic ways of maintaining their vehicles, and we believe this presents an
opportunity to the Company. The need for consumers to maintain their vehicles
longer requires service suppliers to offer a wide range of services at highly
competitive prices. We believe that this can be achieved only by those
businesses that are able to efficiently manage their businesses and find methods
to reduce costs without affecting
service levels, which may best be done through
investments in ‘up to date’ management information systems, specifically those
designed for the automotive market. However, we have recently noticed that some
businesses wishing to invest in new management systems are also finding their
access to credit reduced. This may have a detrimental effect on our revenues if
customers are unable to fund purchases. We still believe that the aftermarket
landscape will continue to change over the next 18 months, with the convergence
of the aftermarket and tire markets, but this rate of change maybe slower than
first expected.
Our
revenue and income is derived primarily from the sale of software, data,
services and support. In the U.K., we also earn a percentage of our revenue and
income from the sale of hardware systems to clients. In the three months ended
September 30, 2010, we generated revenues of $6,602,000 with a net income of
$437,000. 76% of these revenues come from the U.K. market.
We are
headquartered in Barnsley, U.K. and maintain additional offices for our U.S.
operating subsidiary in Dana Point, California, and Allentown, Pennsylvania,
and, for our U.K. operating subsidiary, in Barnsley, Northampton and
Wareham.
The
software that we sell is mainly based on a Microsoft Windows TM -based
technology, although we do still have an older ‘Green Screen’ terminal-based
product. The four main products that we sell in the U.S. each relate to a
specific component of the automotive aftermarket supply chain. First is
“warehouse distribution.” Into this market we sell our Direct Step product,
which enables warehouses to manage sales orders, inventory control and reporting
requirements. Second, these parts are distributed to the next business in the
chain, which is the “Jobber.” Into this market segment we sell our Autopart
product, which manages a Jobber’s whole business (i.e., point of sale, inventory
control, financial and reporting requirements) but more importantly enables the
Jobber to quickly identify the parts that his client needs, either via the
internet or telephone, so that the correct product for the vehicle on the ramp
can be supplied. The third, and next segment of the automotive aftermarket
supply chain is the “Installer,” which repairs and maintains automobiles. The
Installer needs systems that enable him to efficiently and simply manage his
businesses, whether as a single location or multi-location
operation. Into this segment we sell our VAST solution. The fourth
element is e-commerce. Our “OpenWebs” technology allows these three separate
business solutions to connect to each other to allow, among other processes,
ordering, invoicing and stock checking to take place in real-time both up and
down the supply chain. The U.K. market differs from that of the U.S. in that it
does not have the same number of large warehouse distribution centers, so we do
not sell the Direct Step product in the U.K. We continue to sell the Autopart
and Autocat products to the Jobber market, and sell Autowork to the Installer
market.
To date,
our management has identified four areas that it believes we need to focus on.
The first area is the release of one of our U.K. products developed by MAM
Ltd., our U.K. subsidiary, under a Software as a Service (SaaS) model. This is
where software solutions are made available to end-users via the Internet and
does not require them to purchase the software directly but ‘rent’ it over a
fixed period of time. Our management believes that this will be a rapidly
growing market for the U.K. as businesses continue to look for ways of reducing
capital expenditures while maintaining levels of service. Once this has been
successfully deployed in the U.K., we will look to implement a similar model in
the U.S.
The
second area of focus is the sales and marketing strategy within the U.S. market.
To date, although increased resources have been made available for sales and
marketing, they have not brought the levels of return that management had
expected. Management has reviewed the U.S. business’ sales processes and
marketing efforts and made what it believes are significant improvements that
will be successful over the next six months.
The third
area of focus relates to the continued sales and market initiatives tied to the
Autopart product within the U.S. market. A senior member of the U.K. management
team has been appointed to join the U.S. business to head the efforts relating
to this product along with a complementary DirectStep product. To date this move
has proved successful, as we have increased levels of service and knowledge of
our U.S. staff members, and management believes that this will lead to
significant revenue increases within the next six months. While our
management believes that this is the correct route to follow, it is aware that
this effort and the move of personnel may affect the U.K. business following the
transfer of a former key member of our U.K. management team.
The
fourth area is within the U.K. market and we are continually working to sustain
the previous year’s levels of growth in the U.K. business by focusing on
additional vertical markets, which share common issues to that of the automotive
market. We have developed a reputation of high levels of service and knowledge
within the automotive market; and are now working on replicating this reputation
in these additional vertical markets. Our management intends to
carefully monitor this expansion as a result of the current state of the global
economy.
Critical
Accounting Policies
There
were no changes to those policies disclosed in the Annual Report on Form 10-K
for the fiscal year ended June 30, 2010 except as discussed below.
Impact
of Currency Exchange Rate
Our net
revenue derived from sales in currencies other than the U.S. Dollar was 76%
for the three month period ended September 30, 2010, as compared to 72% for the
corresponding period in 2009. As the U.S. dollar strengthens in
relation to the British Pound Sterling (“GBP”), in the comparable periods, our
revenue and income, which is reported in U.S. dollars, is negatively
impacted. Changes in the currency values occur regularly and in some
instances may have a significant effect on our results of
operations.
Income
and expenses of our MAM Ltd. subsidiary are translated at the average exchange
rate for the period. During the three month period ended September 30, 2010, the
exchange rate for MAM Ltd.’s operating results was U.S.$1.54978 per 1GBP,
compared with U.S.$1.6416 per 1GBP for the three month period ended September
30, 2009.
Assets
and liabilities of our MAM Ltd. subsidiary are translated into U.S. dollars at
the period-end exchange rates. The exchange rate used for translating
our MAM subsidiary was U.S.$1.5809 per 1GBP at September 30, 2010 and
U.S.$1.5071 per 1GBP at June 30, 2010.
As of
September 30, 2010, we had a backlog of unfilled orders of business management
systems of $1,761,000, compared to a backlog of $2,478,000 at September 30,
2009. We expect to fulfill approximately 65% of such backlog during
the next six months.
Results
of Operations
Our
results of operations for the three months ended September 30, 2010 compared
with the three months ended September 30, 2009 were as follows:
Revenues. Revenues were $6,602,000 for
the three months ended September 30, 2010, compared with $6,212,000 for the
three months ended September 30, 2009. Revenues for the quarter ended
September 30, 2010 increased $390,000, or 6.3%, during this fiscal period,
resulting from a combination of (i) increased sales of data services and support
from our U.S. operations and (ii) an increase in revenue from our U.K.
subsidiary in its local currency, notwithstanding the negative impact
experienced by our U.K. revenues by the strength of the U.S. dollar vs. the
British Pound, as discussed above. Revenue increased 538,000GBP, or 19.9%, from
organic sales growth in data services and support in our U.K. operations from
2,699,000GBP during the three months ended September 30, 2009 to 3,237,000GBP
during the three months ended September 30, 2010.
The
stronger U.S. dollar resulted in dollar-denominated revenue of $5,017,000 during
2010 as compared to $4,431,000 during 2009, which is an increase of
$586,000. U.S. revenue decreased $196,000 to $1,585,000 in 2010 from
$1,781,000 in 2009 because of decreased sales of software and professional
services.
Cost of Revenues. Total cost
of revenues for the three months ended September 30, 2010, were $2,995,000
compared with $2,947,000 for the same period in 2009, which was an increase
of $48,000 or 1.6%. MAM Ltd.’s expenses were 201,000GBP higher for 2010, or
increased to 1,494,000GBP from 1,293,000GBP for 2009, but the stronger dollar
produced a dollar denominated cost of $2,316,000 for the current vs.
$2,123,000 for the prior year or a $193,000 variance. The U.S. businesses
experienced a decrease in cost of revenues of $144,000, from $824,000 to
$680,000, which was in line with the decreased U.S. revenues. Cost of revenues
as a percentage of revenues decreased from 47.4% for the year ended September
30, 2009 to 45.4% for the three months ended September 30,
2010.
Operating Expenses. The
following tables set forth, for the periods indicated, our operating expenses
and the variance thereof:
|
|
For the Three Months
Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Variance
|
|
|
% Variance
|
|
Research
and development
|
|
$
|
819,000
|
|
|
$
|
844,000
|
|
|
$
|
(25,000
|
)
|
|
|
-3.0
|
%
|
Sales
and marketing
|
|
|
618,000
|
|
|
|
644,000
|
|
|
|
(26,000
|
)
|
|
|
-4.1
|
%
|
General
and administrative
|
|
|
696,000
|
|
|
|
905,000
|
|
|
|
(209,000
|
)
|
|
|
-23.1
|
%
|
Depreciation
and amortization
|
|
|
268,000
|
|
|
|
282,000
|
|
|
|
(14,000
|
)
|
|
|
-5.0
|
%
|
Total
Operating Expenses
|
|
$
|
2,401,000
|
|
|
$
|
2,675,000
|
|
|
$
|
(274,000
|
)
|
|
|
-10.3
|
%
|
Operating
expenses decreased by $274,000 or 10.3% for the three months ended September 30,
2010, compared with the three months ended September 30, 2009. This is due to
the following:
Research and Development Expenses.
Research and development expenses decreased by 3.0% for the three months
ended September 30, 2010, when compared with the same period in the previous
fiscal year. This decrease was primarily due to the reduction of staff in the
U.S.
Sales and Marketing Expenses.
Sales and marketing expenses decreased by $26,000 during the three months
ended September 30, 2010 as compared with the same period in 2009. This decrease
is due to the reduction of costs and staff in the U.S.
General and Administrative Expenses.
General and administrative expenses decreased by $209,000 during the
three months ended September 30, 2010 as compared with the same period in 2009.
This is primarily a result of a decrease in officers’ salary expenses in MAM’s
U.K. office of $243,000 from the closing of the U.K. executive offices,
which included the elimination of two officers and an additional
employee.
In an
effort to conserve cash, we have and continue to reduce costs within our U.S.
operations and have implemented improved reporting systems and controls for the
U.S. business. Should our cost-cutting efforts not be successful or in the event
that our revenue decreases in the future, we may need to seek additional debt or
equity financing. Any inability to obtain additional financing, if required, or
an inability to obtain additional financing on favorable terms, would have a
material adverse effect on our ability to implement our business
plan.
Depreciation and Amortization
Expenses. Depreciation and amortization expenses decreased by $14,000 for
the three months ended September 30, 2010 as compared with the same period in
2009 because of decreased capital expenditures at our U.K.
businesses.
Interest Expense. Interest
expense increased by $39,000 to $417,000 for the three months ended September
30, 2010. We paid ComVest Capital LLC $235,000 in cash interest for the
Term Loan and Revolver and a $50,000 forbearance fee. Total non cash interest
was $132,000 of which $57,000 was accounted for in amortization of debt
discount and debt issuance costs, and $75,000 of forbearance fees due before
November 30, 2010.
Other Income (Expense). Other income (expenses) for
the three months ended September 30, 2010 amounted to $52,000 compared with
income of $88,000 for the period ended September 30, 2009. The increased
expenses for the three month period ended September 30, 2010 were the result of
a $52,000 expense from the increase of the fair value of derivative liabilities
compared to a $38,000 gain in the same period in 2009. As more
fully described in the notes to the condensed consolidated financial statements,
on July 1, 2009, we adopted the accounting standard that provides guidance
for determining whether equity-linked financial instruments or embedded
features, are indexed to an entity’s own stock. The standard applies
to any freestanding financial instrument or embedded feature that has the
characteristics of a derivative, and to any freestanding financial instruments
that are settled in an entity’s own common stock. As such, we were
required to reclassify certain amounts from the equity section of the balance
sheet to the liabilities section. In addition, the value of these
instruments must be reassessed by us as of each balance sheet date.
Income Taxes. Income taxes
increased by $80,000 for the three months ended September 30, 2010 as compared
to September 30, 2009. This increase was due to higher tax requirements
resulting from increased profits at our U.K. subsidiary.
Net Income. As a result of the
above, we realized net income of $437,000 for the three months ended September
30, 2010, compared with net income of $80,000 for the three months ended
September 30, 2009.
Liquidity
and Capital Resources
To date,
most of our profits have been generated in Europe, but with the introduction of
new products and efforts to streamline our U.S. operations, we expect to see an
increase in overall revenues with a contribution from U.S. operations in fiscal
2010.
At
September 30, 2010, we had cash and cash equivalents of $847,000.
During
the three months ended September 30, 2010 we reduced our Term Loan by $676,000
using internally generated funds and working capital.
We
continued to experience negative cash flow during the quarter because of
$676,000 of repayments on long-term debt, the increased interest rates on the
Term Loan and the Revolving Credit Facility, the Forbearance Fees charged by the
lender and the repayment of the Term Loan were in excess of the working capital
generated by operations.
The new
$3.3 million equity financing, from the sale of 51,516,111 shares of common
stock at $0.065 per share, and the $2 million, 3.4% per annum, three year term
loan, were both funded in October 2010 and has resolved the negative cash flow
issues.
If
internal revenues prove insufficient to support our growth plans, we may
consider raising additional funds through debt or equity financing. There can be
no assurance that such funding will be available on acceptable terms, in a
timely fashion or even available at all. Should new funds be delayed, we plan to
reduce the burden on our current funding to a sustainable level and to tailor
our development programs accordingly.
We expect
to see continued growth from both the U.S. and U.K. operations during fiscal
2011, with strong growth in revenues and operating income from the U.S.
operation. We have identified a number of opportunities to widen our client base
within the automotive industry and are actively pursuing those at this time. We
also expect to see increases in revenue over the next two quarters, specifically
due to additional products that have been developed by the U.S. operation which
are currently being released to customers, and the reintroduction of our
Autopart line of products in the U.S. market.
We intend
to continue to work at maximizing customer retention by supplying and developing
products that streamline and simplify customer operations, thereby increasing
their profit margin. By supporting our customers’ recurring revenues, we expect
to continue to build our own revenue stream. We believe that we can continue to
grow our customer base through additional sales personnel, targeted media and
marketing campaigns and products that completely fit clients’ requirements. We
also intend to service existing clients to higher levels and increasingly
partner with them so that together we’ll both achieve our goals.
Revenues
in the U.K. are continuing to generate positive cash flow and free cash but the
loss in the U.S. operations and corporate expenses resulted in a negative cash
flow for the quarter. Our current plans still require us to hire additional
sales and marketing staff, to expand within the U.S. market, to target new
vertical markets effectively in the U.K. and to support expanded operations
overall.
We
believe our plan will strengthen our relationships with our existing customers
and provide new income streams by targeting new vertical markets for our
AutoPart product.
Not
applicable.
(a) Evaluation of Disclosure Controls and
Procedures
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of the our management,
including our Chief Executive Officer and the Company’s Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of September 30,
2010.
(b) Changes in internal control over
financial reporting
There
were no changes in our internal control over financial reporting in the
Company’s first fiscal quarter of the fiscal year ending June 30, 2011 covered
by this Quarterly Report on Form 10-Q, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
From time
to time, we are subject to various legal claims and proceedings arising in the
ordinary course of business. The ultimate disposition of these proceedings could
have a materially adverse effect on the consolidated financial position or
results of operations of the Company.
On
February 17, 2010, Mr. Arthur Blumenthal, a former shareholder of Anderson BDG,
Inc., commenced a civil action against the Company, certain subsidiaries, and
current and former officers and directors of the Company. We had
previously recorded a liability for $817,000 and recorded an additional expense
of $513,000 in the quarter ending March 31, 2010. On April 16, 2010, we settled
the litigation with Mr. Blumenthal for $1,250,000. On April 19, 2010, we paid
Mr. Blumenthal $350,000 as partial payment of the settlement
amount. The balance of the settlement amount is payable through
November 2012 in equal monthly payments of $31,750, which includes interest at
7%. In the event we default in payment, Mr. Blumenthal may elect to reinstitute
the original litigation. Of the remaining balance due Mr. Blumenthal of
$772,000, $332,000 is included in the “Current portion of settlement liability”
and $440,000 is included “Settlement liability, net of current
portion.”
Not
applicable.
On July
7, 2010, we issued 126,692 shares of common stock to certain directors, which
were valued at $10,135.
On July
6, 2010, we issued 214,844 shares of common stock to certain directors in lieu
of fees, which were valued at $17,000.
On July
16, 2010, we issued 655,769 shares of common stock to certain officers in lieu
of compensation, which were valued at approximately $52,000 based on the closing
price of our common stock.
On July
20, 2010, we entered into an agreement with certain warrant holders to exchange
11,652,301 of their warrants for 1,792,662 shares of our Series A Preferred
Stock. The agreement provides that the Series A Preferred Stock are contingently
convertible into shares of our common stock only upon the approval of our
shareholders to amend our certificate of incorporation to increase the number of
authorized shares. As of the date of this filing, our shareholders have not
provided the required approval.
The
above transactions were not registered under the Securities Act in reliance
on an exemption from registration set forth in Section 4(2) thereof and Rule 506
of Regulation D promulgated hereunder as a transaction by the Company not
involving any public offering and the purchasers met the “accredited investor”
criteria required by the rules and regulations promulgated under the Securities
Act.
None.
No
matters were submitted to a vote of security holders in the first quarter of the
Company’s fiscal year ending June 30, 2011.
ITEM
5. OTHER INFORMATION.
There
have been no material changes to the procedures by which security holders may
recommend nominees to our Board of Directors.
ITEM
6. EXHIBITS
Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Principal 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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.
|
MAM
Software Group, Inc.
|
|
|
|
|
Date:
November 1, 2010
|
By:
|
/s/
Michael G. Jamieson
|
|
|
|
Michael
G. Jamieson
|
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
November 1, 2010
|
By:
|
/s/
Charles F. Trapp
|
|
|
|
Charles
F. Trapp
|
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
|
EXHIBIT
INDEX
Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Principal 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
- 12
-