UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
COMMISSION FILE NUMBER: 0-30983
ADVANT-E CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE | 88-0339012 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
2680 Indian Ripple Rd.
Dayton, Ohio 45440
(Address of principal executive offices)
(937) 429-4288
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 14, 2007 the issuer had 6,478,714 outstanding shares of Common Stock, $.001 Par Value.
Transitional Small Business Disclosure Format: Yes ¨ No x
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, | |||||
2007 | 2006 | ||||
Revenue |
$ | 1,416,323 | 1,262,169 | ||
Cost of revenue |
508,568 | 407,868 | |||
Gross margin |
907,755 | 854,301 | |||
Marketing, general and administrative expenses |
713,478 | 595,855 | |||
Operating income |
194,277 | 258,446 | |||
Other income, net |
22,668 | 16,975 | |||
Income before taxes |
216,945 | 275,421 | |||
Income tax expense |
85,800 | 107,715 | |||
Net income |
$ | 131,145 | 167,706 | ||
Basic earnings per share |
$ | 0.02 | 0.03 | ||
Diluted earnings per share |
$ | 0.02 | 0.03 | ||
Weighted average shares outstanding |
6,478,714 | 6,403,174 | |||
Weighted average shares outstanding, assuming dilution |
6,478,714 | 6,426,009 | |||
The accompanying notes are an integral part of the consolidated condensed financial statements.
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ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2007 (Unaudited) |
December 31, 2006 | ||||
Assets |
|||||
Current Assets: |
|||||
Cash and cash equivalents |
$ | 2,313,287 | 2,209,782 | ||
Short-term investments |
275,846 | 274,434 | |||
Accounts receivable, net |
448,948 | 477,639 | |||
Prepaid expenses and deposit |
56,470 | 28,339 | |||
Total current assets |
3,094,551 | 2,990,194 | |||
Software development costs, net |
244,896 | 247,621 | |||
Property and equipment, net |
381,010 | 386,697 | |||
Total assets |
$ | 3,720,457 | 3,624,512 | ||
Liabilities and Shareholders Equity |
|||||
Current liabilities: |
|||||
Accounts payable |
$ | 79,449 | 66,936 | ||
Accrued salaries and other expenses |
125,791 | 157,802 | |||
Income taxes payable |
69,409 | 109,642 | |||
Deferred income taxes |
74,430 | 53,119 | |||
Deferred revenue |
116,344 | 112,846 | |||
Total current liabilities |
465,423 | 500,345 | |||
Deferred income taxes |
165,506 | 165,784 | |||
Total liabilities |
630,929 | 666,129 | |||
Shareholders equity: |
|||||
Common stock, $.001 par value; 20,000,000 shares authorized; 6,478,714 outstanding |
6,478 | 6,478 | |||
Paid-in capital |
1,641,906 | 1,641,906 | |||
Retained earnings |
1,441,144 | 1,309,999 | |||
Total shareholders equity |
3,089,528 | 2,958,383 | |||
Total liabilities and shareholders equity |
$ | 3,720,457 | 3,624,512 | ||
The accompanying notes are an integral part of the consolidated condensed financial statements.
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ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, |
|||||||
2007 | 2006 | ||||||
Cash flows from operating activities: |
|||||||
Net income |
$ | 131,145 | 167,706 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: |
|||||||
Depreciation |
48,487 | 29,553 | |||||
Amortization of software development costs |
18,088 | 32,383 | |||||
Loss on disposal of assets |
| 24,221 | |||||
Deferred income taxes |
21,033 | 35,723 | |||||
Purchases of trading securities |
(74,483 | ) | | ||||
Proceeds from sales of trading securities |
79,679 | | |||||
Net realized gains on sales of securities |
(6,608 | ) | (4,241 | ) | |||
Increase (decrease) in cash arising from changes in assets and liabilities: |
|||||||
Accounts receivable |
28,691 | (48,874 | ) | ||||
Prepaid expenses |
(28,131 | ) | 3,288 | ||||
Accounts payable |
12,513 | 19,694 | |||||
Accrued salaries and other expenses |
(32,011 | ) | 16,796 | ||||
Income taxes payable |
(40,233 | ) | (298,008 | ) | |||
Deferred revenue |
3,498 | 27,426 | |||||
Net cash flows from operating activities |
161,668 | 5,667 | |||||
Cash flows from investing activities: |
|||||||
Purchases of available-for-sale securities |
| (35,545 | ) | ||||
Proceeds from sale of available-for-sale securities |
| 36,914 | |||||
Purchases of equipment |
(42,800 | ) | (28,697 | ) | |||
Software development costs |
(15,363 | ) | (69,649 | ) | |||
Net cash flows from investing activities |
(58,163 | ) | (96,977 | ) | |||
Net increase (decrease) in cash and cash equivalents |
103,505 | (91,310 | ) | ||||
Cash and cash equivalents, beginning of period |
2,209,782 | 1,763,435 | |||||
Cash and cash equivalents, end of period |
$ | 2,313,287 | 1,672,125 | ||||
Supplemental disclosures of cash flow items: |
|||||||
Income taxes paid |
$ | 105,000 | 370,000 |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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ADVANT-E CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
March 31, 2007
Note 1: Basis of Presentation
The accompanying unaudited consolidated condensed financial statements include the accounts of Advant-e Corporation and its wholly-owned subsidiary Edict Systems, Inc. (the Company). Inter-company accounts and transactions are eliminated in consolidation.
The statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all of the information and notes to financial statements required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in Advant-e Corporations 2006 Form 10-KSB filed with the Securities and Exchange Commission.
Note 2: Software Development Costs
Software development costs at March 31, 2007 and the changes during the three months then ended are summarized as follows:
Cost | Accumulated Amortization |
Net | ||||||
Balance, January 1, 2007 |
$ | 1,497,372 | 1,249,751 | 247,621 | ||||
Additions |
15,363 | | 15,363 | |||||
Amortization |
| 18,088 | (18,088 | ) | ||||
Balance, March 31, 2007 |
$ | 1,512,735 | 1,267,839 | 244,896 | ||||
The unamortized costs relate exclusively to internal use software and costs associated with web site development and related enhancements. The additions in the first three months of 2007 relate to costs capitalized in connection with the development of a new hosted service value-added application.
The ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic lives and changes in software and hardware technologies. Impairment of asset value is considered whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Note 3: Income taxes
Income tax expense consists of the following:
Three Months Ended March 31, | |||||
2007 | 2006 | ||||
Current expense |
$ | 64,767 | 71,992 | ||
Deferred expense |
21,033 | 35,723 | |||
Total income tax expense |
$ | 85,800 | 107,715 | ||
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The following is a reconciliation of income tax at the federal statutory rate of 34% to the income tax expense:
Three Months Ended March 31, | |||||
2007 | 2006 | ||||
Income taxes at federal statutory rate |
$ | 73,761 | 93,643 | ||
State income taxes and other |
12,039 | 14,072 | |||
Income tax expense |
$ | 85,800 | 107,715 | ||
Note 4: Earnings per share
The reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the three months ended March 31, 2007 and 2006, respectively, follows:
Income (Numerator) |
Average Shares (Denominator) |
Per Share Amount | ||||||
Three months ended March 31, 2007 |
||||||||
Earnings per share: |
||||||||
Net income available to shareholders |
$ | 131,145 | 6,478,714 | $ | 0.02 | |||
Three months ended March 31, 2006 |
||||||||
Basic and diluted earnings per share: |
||||||||
Net income available to shareholders |
$ | 167,706 | 6,403,174 | $ | 0.03 | |||
Effect of potentially dilutive securities: |
||||||||
Outstanding warrants |
| 22,835 | | |||||
Net income available to shareholders plus assumed exercise of warrants |
$ | 167,706 | 6,426,009 | $ | 0.03 | |||
At March 31, 2006 the Company had 95,000 outstanding warrants for the purchase of the Companys common stock, as follows: 75,000 shares at $1.205 per share which were exercised in December 2006, and 20,000 shares at $1.48 per share which expired on June 25, 2006.
Note 5: Comprehensive income
The components of comprehensive income, net of tax, were as follows:
Three Months Ended March 31, |
||||||
2007 | 2006 | |||||
Net income |
$ | 131,145 | 167,706 | |||
Other comprehensive income: |
||||||
Net unrealized gain on available-for-sale securities (net of taxes of $7,399) |
| 11,996 | ||||
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $1,618) |
| (2,623 | ) | |||
Total comprehensive income |
$ | 131,145 | 177,079 | |||
In the fourth quarter of 2006 management determined that it was appropriate to reclassify the short-term investments from available-for-sale securities to trading securities due to the active and frequent buying and selling of the securities. As a result, unrealized gains and losses are recognized in net income for periods beginning after September 30, 2006.
Note 6: Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company did not elect to adopt early the provisions of SFAS No. 159, and the Company does not believe the adoption in 2008 of this Standard will have a material impact on the financial statements.
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ITEM2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Form 10-QSB contains forward-looking statements, including statements regarding the expectations of future operations. For this purpose, any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as may, will, expect, believe, anticipate, estimate, or continue or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within the Companys control. These factors include, but are not limited to, economic conditions generally and in the industries in which the Company may participate, competition within the chosen industry, including competition from much larger competitors, technological advances, and the failure to successfully develop business relationships. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. This item should be read in conjunction with Item 1. Financial Statements and other items contained elsewhere in this report.
Products and services
The Company, through its wholly-owned subsidiary Edict Systems, Inc., is a provider of business-to-business (B2B) electronic commerce (e-commerce) products and services, offering Electronic Data Interchange (EDI) based and proprietary solutions for businesses of all sizes. The Company develops, markets, and supports B2B e-commerce software products and provides Internet-based communication and data processing services that enable businesses to process transactions electronically.
The Company provides consultative services for its customers, generally small and medium sized suppliers of larger companies, where the Company interfaces between its customers and the buyers to facilitate the EDI connectivity required for document processing.
The following comprise the Companys three principal business products/services:
| Web EDIInternet-based supply chain solution for the grocery and other industries |
|
EnterpriseEC®`®Internet-based Electronic Business Transaction Network Services |
| Value-Added ApplicationsInternet-based solutions that enhance the value of electronic commerce capabilities |
Critical Accounting Policies and Estimates
Revenue recognition
The Company recognizes revenues in accordance with the Securities Exchange Commission Staff Accounting Bulletin 101 (SAB 101), which requires the Company to recognize revenue when, in addition to other criteria, delivery has occurred or services have been rendered.
Revenues from Internet-based products and services (Web EDI and EnterpriseEC, etc) are comprised of four componentsaccount activation and trading partner set-up fees, monthly subscription fees, usage based transactional fees and customer payments for the Companys development of applications designed to meet specific customer specifications.
Revenues earned from account activation and trading partner set-up fees are recognized after the Company performs consultative work required in order to establish an electronic trading partnership between the customer and their desired trading partners. Trading partnerships, once established, require no ongoing effort on the part of the Company and customers are able to utilize the electronic trading partnerships either directly with their customers or via a service provider other than the Company.
Revenue from monthly subscription fees is recognized over the period to which the subscription applies.
Revenue from usage-based transaction fees is recognized in the period in which the transactions are processed.
Revenue from customer payments for the Companys development of applications designed to meet specific customer specifications is recognized over the twelve-month to twenty-four-month contract period.
Software Development Costs
The Company accounts for the costs of computer software that it develops for internal use and costs associated with operation of its web sites in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
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Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and Emerging Issues Task Force (EITF) No. 00-2 Accounting for Web Site Development Costs. Such capitalized costs represent solely the salaries and benefits of employees working on the graphics and content development stages, or adding functionality or features. In accordance with SOP 98-1 and EITF No. 00-2, overhead, general and administrative and training costs are not capitalized. The Company accounts for the costs of computer software that it sells, leases and markets as a separate product in accordance with Financial Accounting Standards Board Statement No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalized costs are amortized by the straight-line method over the remaining estimated economic lives of the software application, generally three years, and are reported at the lower of unamortized cost or net realizable value.
Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company did not elect to adopt early the provisions of SFAS No. 159, and the Company does not believe the adoption in 2008 of this Standard will have a material impact on the financial statements.
Results of Operations
Executive Summary
The Companys revenue in the first quarter of 2007 of $1,416,323 increased by $154,154, or 12%, over revenue in the first quarter of 2006. Increases occurred in the Companys major products, GroceryEC, AutomotiveEC, and EnterpriseEC. Net income in the first quarter of 2007 of $131,145 decreased by $36,561 (22%) compared to net income of $167,706 in the first quarter of 2006.
Revenue
The Companys revenue increase of 12% is less than recent historical rates of increase that ranged from 19% to 29% when comparing each quarter in 2004 through 2006 to the comparable quarter of the prior year. Revenue from AutomotiveEC increased by 27%, and revenue from EnterpriseEC, the Companys Electronic Trading Network service, increased by 29%; however, revenue from GroceryEC, which comprised approximately 69% of the Companys revenue in the first quarter of both 2007 and 2006, and revenue from other Web EDI products grew by 11%. Revenue from Hub and Spoke ramp related shipments of printers and related labeling software and testing and certification services decreased by $34,252, or 62%. The Company is re-channeling its sales and marketing efforts to increase the rate of revenue growth in the last half of 2007 by targeting specific companies primarily in the grocery, automotive and OEM and consumer packaged goods industries with the objective of adding several new Hub Companies to the Companys Hub and Spoke marketing program.
Gross margin
The Companys gross margin, as a percent of revenue, was 64% in the first quarter of 2007 compared to 68% in the first quarter of 2006. The gross margin in the first quarter of 2007 declined primarily because lower than expected revenue growth was insufficient to cover increased technical and support personnel costs in the first quarter of 2007 compared to the first quarter of 2006. These costs increased by approximately $75,028 due to salary increases for key technical and support personnel and the addition of employees. Gross margin was also adversely affected by a $23,026 reduction in capitalized software development costs.
Marketing, general and administrative expenses
Marketing, general and administrative expenses increased by $117,623, or 20%, in the first quarter of 2007 compared to the first quarter of 2006; and increased from 47% of revenue in the first quarter of 2006 to 50% of revenue in the first quarter of 2007. The increases occurred primarily as a result of an additional $66,417 for personnel costs related to an increase in the number of sales and marketing personnel and for salary increases for key sales personnel. Additional spending of $32,198 for programs intended to accelerate revenue growth in the grocery, automotive and other industries also contributed to the increase.
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Capitalized Development Costs The following table sets forth the cost and accumulated amortization of the products comprising the Software Development Costs asset at March 31, 2007:
Product |
Cost | Accumulated Amortization |
Net | ||||
Web EDI and enhancements |
$ | 796,721 | 796,721 | | |||
Web EDI, new version |
229,990 | 457 | 229,533 | ||||
Hosted service value-added-applications |
15,363 | | 15,363 | ||||
EnterpriseEC |
470,661 | 470,661 | | ||||
Total |
$ | 1,512,735 | 1,267,839 | 244,896 | |||
The Company has essentially completed the capitalization of software development costs for its new version of Web EDI, and expects to implement the new version later in 2007.
Liquidity and Capital Resources
In the first three months of 2007, net cash flows from operating activities amounted to $156,472 compared to $5,667 in the first three months of 2006. This increase was caused primarily by the payment of Federal income taxes, in accordance with IRS regulations, in the first quarter of 2006 for the 2005 tax year, whereas payments in the first quarter of 2007 related to last year, 2006.
ITEM 3. | Controls and Procedures |
Attached as exhibits to the Form 10-QSB are certifications of the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). These Controls and Procedures section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
The CEO and the CFO have conducted an evaluation of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Form 10-QSB. Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Based upon the controls evaluation, our CEO and CFO have concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Companys management, including the Companys chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure; and that the Companys disclosure controls and procedures were effective during the period covered by the Companys report on Form 10-QSB for the quarterly period ended March 31, 2007.
During the period covered by this report, there were no changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. | Exhibits and Reports on Form 8-K |
Exhibit Number |
Description |
Method of Filing | ||
3(i) | Amended Certificate of Incorporation | Previously filed (A) | ||
3(ii) | By-laws | Previously filed (B) | ||
4 | Instruments defining the rights of security holders including indentures | Previously filed (C) | ||
4.1 | Amendment to warrant certificated dated August 9, 2005 | Previously filed (D) | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification | Filed herewith | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification | Filed herewith | ||
32.1 | Section 1350 Certification | Filed herewith | ||
32.2 | Section 1350 Certification | Filed herewith |
(A) | Filed with Amendment No. 2 to Form 10-SB filed as of October 13, 2000 |
(B) | Filed with Amendment No. 1 to Form 10-SB filed as of July 17, 2000 |
(C) | Filed with Form 10-SB filed as of July 1, 2000. |
(D) | Filed with Form 10-QSB for the quarterly period ended September 30, 2005 as of November 14, 2005. |
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Signatures
In accordance with 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.
Advant-e Corporation | ||||
(Registrant) | ||||
May 15, 2007 |
By: | /s/ Jason K. Wadzinski | ||
Jason K. Wadzinski | ||||
Chief Executive Officer | ||||
Chairman of the Board of Directors | ||||
May 15, 2007 |
By: | /s/ James E. Lesch | ||
James E. Lesch | ||||
Chief Financial Officer | ||||
Principal Accounting Officer | ||||
Member of the Board of Directors |
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