GROVEWARE TECHNOLOGIES LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
Certain statements, other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives,
and expected operating results, and the assumptions upon which those statements
are based, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally are identified by the words "believes,"
"project," "expects," "anticipates," "estimates," "intends," "strategy," "plan,"
"may," "will," "would," "will be," "will continue," "will likely result," and
similar expressions. We intend such forward-looking statements to be covered by
the safe-harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and are including this
statement for purposes of complying with those safe-harbor
provisions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on our operations
and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions, legislative/regulatory changes, availability of
capital, interest rates, competition, and generally accepted accounting
principles. These risks and uncertainties should also be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Further information concerning our business, including
additional factors that could materially affect our financial results, is
included herein and in our other filings with the SEC.
The modern world of communications technology is an arena of constant and rapid
evolution. There is no greater evidence of this change than in the accelerating
adoption of sophisticated wireless devices to streamline and facilitate the
exchange of voice and data communication. Over the past two decades, we have
witnessed the successive introduction of hardwired cellular phones, handheld
"dumbphones", the handheld Palm™ computers and then a revolution with the advent
of the BlackBerry® smartphone followed by the iPhone® and a myriad of similar
devices utilizing the Android™ smartphone platform developed by Google©. During
the last few years, we have seen the emergence and incredible growth of tablet
technologies led by Apple's iPad®, Research in Motion's Playbook™, and a variety
of tablet devices utilizing the Android™ and Windows Mobile™ mobile operating
Wireless devices are changing how people communicate and exchange information.
The wireless revolution has brought about monumental changes to global politics,
to the scale and complexity of social interaction, to the accessibility of
information and has simplified consumer transactions such as banking,
advertising and the buying and selling of goods and services.
Smartphone and wireless tablet devices are now being discovered by business and
government as transformational tools for the collection, transfer and
utilization of information and for streamlining business-to-business (B2B)
transactions. The adoption of wireless technologies, and in particular of
wireless tablet devices, is expected to far exceed the use of conventional PC's
over the next five years.
It is in this rapidly changing business environment that GroveWare has
positioned itself. GroveWare's products are uniquely suited to helping
companies, governments and institutions gather and exchange data. In an
environment where all commercial and government entities are seeking to find
cost-saving and efficiency-gaining productivity tools, the increasingly
sophisticated smartphone and tablet hardware can now be paired with GroveWare's
software to generate productivity enhancements on a level not seen since the
advent of micro-computers over 30 years ago.
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GroveWare provides Commercial Off-the Shelf-based (COTS) SmartForm, advanced
workflow technology and mobile solutions for automating and mobilizing business
processes at the enterprise level. Such technology greatly helps organizations
to move away from "paper-based" operations to smart, dynamic, mobile electronic
"e-forms," thus enabling enterprises to achieve operational efficiencies by
extending their enterprise ERP functions from the "back office" to a "field
Our company specializes in the rapidly-growing Mobile Business Process
Management (BPM) marketplace. It has developed an advanced e-form-centric mobile
application, "MobiTask™" for all of the mainstream wireless operating systems
used by smartphones and tablets such as: Apple iOS®, Android™, BlackBerry® and
Windows™. GroveWare's MobiTask™ is a single platform application compatible with
all wireless devices such as: iPhone®, iPad®, Samsung Galaxy®, BlackBerry®
Playbook™, etc. and employs a powerful core technology that has helped our
company to become a leader in the field of "Rapid Mobile Application
Development" for enterprises.
GroveWare believes it is uniquely positioned to take advantage of the
transformation that is currently taking place in the enterprise space, i.e. the
massive shift from laptops to wireless tablets devices and the rush to develop
productivity applications for enterprise use.
GroveWare's eXFORMA™ middleware and MobiTask™ client applications are at the
heart of the solution offered. It is a process automation platform that can be
configured to dynamically capture data utilizing web-based forms integrated with
a sophisticated workflow engine. The application is delivered on thin client
mobile devices. The system resides on numerous industry-standard back-end
databases and is supported by flexible reporting capabilities.
Over the past six months, and by working closely with its channel partners, most
specifically, Verizon Wireless (VZ), GroveWare has enjoyed tremendous success in
over two dozen pilot projects with several federal, state and local government
departments and agencies and a wide selection of large and small businesses in
the construction, property management, logistics, engineering, education,
healthcare and transportation sectors. Virtually all of these pilots are now
progressing to full deployment and management is confident that it will be able
to convert these projects into a significant stream of revenue during the Q4 of
this year and in 2013.
Results of Operations for the Three and Nine Months Ended September 30, 2012 and
We generated $87,370 in revenues for the three months ended September 30, 2012,
as compared with $100,140 for the three months ended September 30, 2011. We
generated $158,459 in revenues for the nine months ended September 30, 2012, as
compared with $117,570 for the nine months ended September 30, 2011.
Our revenues for all periods resulted primarily from the provision of
professional services and user subscriptions to smaller enterprises and from
proof-of-concept and trial installations with several state and federal
As the company more fully implements its sales and marketing plan during the
first half of 2013, we expect that our business model will generate revenue from
four primary sources:
1. License Sales - eXFORMA BPM Server and MTM Server license as well as per seat
licenses for MobiTask, eXFORMA and MTM.
License fees are expected to be generated from traditional, paid-up software
licenses primarily sold as a result of referral from non-carrier partners and
from leads generated by our inside sales team. Software license fee revenue is
projected to grow from $25,000 in 2012 to $390,000 by 2015. The average
enterprise software license fee for eXFORMA is $49,000 per server installation.
MTM is sold as a combination server component and per user license. The average
server cost is $8,000 per implementation and $120-$150 perpetual license per
2. License Subscription Sales - Primarily through the carrier channel, annual
and multi-year subscriptions provide us with recurring revenue based on a
monthly per user fee.
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During the next twelve months, the U.S. outbound Business Development Managers
will primarily support and develop leads initiated or referred through the
carrier relationship, initially Verizon Wireless, but anticipated to expand to
the other major U.S. carriers and wireless hardware providers. Monthly software
license fees are targeted at $19.99 to $24.99 per user based on a two year
subscription. We are currently negotiating with Verizon to have these fees
collected by the carrier together with its other wireless charges and remitted
to us monthly en masse. Initially, we expect monthly subscription sales to be
minimal, with the hope of $2,000 monthly by the end of Q4 of 2013.
Gross revenues from carrier channel subscription sales are projected to grow
rapidly to $2.6 million in 2013 and increasing to in excess of $11.4 million by
2015. Management believes that these numbers are very conservative given the
size of the carriers' enterprise customer base and the overall market potential.
3. Support Fees - Annual recurring revenue from maintenance, subscription fees,
seat upgrades and product support services.
Recurring revenue is expected to be generated from annual technical support and
maintenance fees (including seat upgrade fees) and service fees. Recurring
revenue from these sources is projected to grow from $15,000 in 2012 to slightly
less than $80,000 by 2015. Technical Support and Maintenance fees will apply to
the traditional paid-up licenses, calculated at a rate of 20% of the license
fees. The subscription fees will apply to the hosted model and will be earned
based on the number of seats. Over the course of time it is expected that
customers will increase the number of end-users (seats) within their
organizations, purchasing incremental subscriptions or seat licenses.
4. Professional Service Fees - For customization, configuration, development and
deployment in support of eXFORMA BPM, MTM and MobiTask.
Service fees include services provided directly to end-user organizations and to
channel partners primarily for implementation services and ongoing consulting
services. Due to the nature of the BPM market initial implementation often
requires considerable professional services and service revenue will be
approximately equal to 10%-15% of license fees revenue. The type of services
provided will include business analysis, design and implementation, as MobiTask,
eXFORMA and MTM will be implemented to interact with enterprise applications and
to meet specific task requests of the customer. Although paid for by the
customer, the IP associated with each customization of the platform remains with
us and is available for resale to other clients significantly reducing the
direct cost to us of future product development.
Professional Service revenue is expected to increase commensurate with software
sales growing from $105,000 in 2012 to in excess of $7.6 million by 2015. We
consider service delivery to be an important component to our success and with
every success we will be adding a new stream of future revenue as clients
consider expanding the use of the technology to other areas of their
Management anticipates total revenues of $265,000 in 2012 and with successful
funding initiatives and sound execution of our business plan, these revenues
will increase to $19.4 million by 2015.
During 2012, we expect that 52.8% of revenue will be generated through direct
sales, technical support and professional services billings, while 47.2% of
revenue will result from subscription sales primarily through the Verizon
partnership. By the end of 2015, carrier-based subscription sales as a
percentage of total revenue are projected to level out to the 60% range.
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We incurred $191,103 in operating expenses for the three months ended September
30, 2012, as compared with operating expenses of $208,271 for the three months
ended September 30, 2011. Our general and administrative expenses were $160,307
for the three months ended September 30, 2012, as compared with general and
administrative expenses of $156,529 for the three months ended September 30,
We incurred $454,896 in operating expenses for the nine months ended September
30, 2012, as compared with operating expenses of $317,790 for the nine months
ended September 30, 2011. Our general and administrative expenses were $394,676
for the nine months ended September 30, 2012, as compared with general and
administrative expenses of $234,105 for the nine months ended September 30,
We incurred $21,504 in interest expenses for the three months ended September
30, 2012, as compared with $44,179 for the three months ended September 30,
2011. We incurred $62,553 in interest expenses for the nine months ended
September 30, 2012, as compared with $44,291 for the nine months ended September
As a result of our channel partner distribution strategy, the business model is
highly leveraged. Therefore, we expect to maintain a low level of fixed
corporate overhead leading to projections of breakeven profitability beginning
in Q2 - 2013.
Cost of Service/Sales
The cost of service/sales expense is associated with delivery of a sales unit,
including direct labor cost associated with the delivery of implementation and
consulting services provided directly to end-users or to distribution partners
and sales commissions. The cost of service/sales is projected to be
approximately 6% of total revenue.
Sales and Marketing
Sales and marketing expenses include the costs to market products and to manage
and support the channel partners and direct sales team. Initially in 2012, this
includes staffing to recruit distribution partners. Subsequently, staffing grows
to provide adequate support, service and account management services. Sales and
marketing expenses also include expenses to recruit distribution partners as
well as costs for product promotion. Sales and marketing expenses, exclusive of
commissions, are expected to be approximately 29% of total revenue in 2012 but
declining to 7.5% by 2015 as revenue increases and more normative
cost-efficiencies are experienced.
We expect that sales staff at the end of Q1 - 2013 will include only the
newly-engaged VP of Sales, three regional sales reps (focused on the Verizon
relationship) for the Northeast, Western and Central U.S. one inside sales rep
and one sales support person, the latter two both based in Toronto. We further
expect the sales roster to expand to eight by the end of 2013 and the complement
will be adjusted gradually as dictated by revenue growth.
Product Development, R&D and Technical Support
Product development expense primarily includes the costs of direct in-house
labor associated with the staffing requirement for development, maintenance and
upgrades of the software product. Product development expenses are expected to
approximately average 21% of total revenue in 2012, but will rapidly decline to
5% by 2015 as revenue increases and more normative cost-efficiencies are
General and Administrative (G&A)
The general and administrative costs represent the labor expense of corporate
support staff of both fixed and semi-variable natures, which will increase with
additional product sales. G&A also includes other items such as recruitment and
insurance costs associated with our growth. General and administrative expenses
are projected to be approximately 49% of total revenue in 2012 but again
declining rapidly to 6.5% by 2015 as revenue increases and more normative
cost-efficiencies are experienced.
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We have acquired an exclusive license from GroveWare Technologies Inc. to market
and support MobiTask, eXFORMA, eXFORMA BPM SUITE and MTM throughout the United
States. We are also permitted under the license to further develop and improve
these and other product offerings to U.S. customers.
As compensation for these exclusive marketing and development rights, we
currently pay a royalty equal to 20% of all revenue generated from the sale of
the licensed products. The terms of the royalty arrangement are detailed in an
Exclusive Software Master License Agreement executed between the parties on
December 31, 2009.
The Master License Agreement is currently under renegotiation and the attached
projections assume that the royalty rate will be reduced to 15% of revenue and
will be levied only on revenue generated from the sales of software licenses and
subscriptions and will no longer include professional services and technical
support revenue. As well, royalties will be paid as subscription revenue is
recognized on our books.
Depreciation and Amortization
These expenses include depreciation of general office equipment and computer
equipment, based on estimated useful lives of five years for furniture and
office equipment, and three years for computer related equipment. We have
capitalized the costs associated with the development of the software product
but not the costs to enhance the existing product.
We had a net loss of $83,325 for the three months ended September 30, 2012, as
compared with a net loss of $152,310 for the three months ended September 30,
2011. We had a net loss of $358,990 for the nine months ended September 30,
2012, as compared with a net loss of $244,511 for the nine months ended
September 30, 2011.
As with most enterprise software sales, gross margins are very attractive at
72%. We expect that EBITDA margins will be negative through the end of 2012, but
are projected to increase from 28.4% in 2013 to a very favorable 57% by 2015. We
further expect net earnings before taxes will increase from a loss of $360,000
in 2012 to a pre-tax profit of over $10.7 million by 2015, primarily because of
increasing sales over moderating expense levels.
The break-even monthly sales level of $350,000 are forecast for Q1 of 2013 with
cash flows becoming positive at sales levels of less than $400,000, expected to
be achieved in early Q2 of 2013.
We are projecting a pre-tax loss in 2012 because of the late Q4 closing of the
company's re-financing and the subsequent ramp of sales activity with a rapid
increase of pre-tax earnings in 2013 and 2014 to $1.4 million and $6.4 million
An assumed moderate 25% growth rate in 2015 and 2016 may result in projected
recognized revenues of $19.4 and $23.4 million with pre-tax earnings of $10.7
and $13.7 million, respectively.
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Liquidity and Capital Resources
We had $72,084 in current assets and $850,669 in current liabilities as of
September 30, 2012. We therefore had a working capital deficit of $778,585.
Operating activities provided $23,732 for the nine months ended September 30,
2012. Our net loss of $358,990 and accounts receivable of $53,803 accounted for
our negative operating cash flow, offset primarily by company expenses paid by
related parties in the amount of $240,155, related party accounts payable of
$68,590, interest on notes payable of $57,194, and related party royalties
payable of $32,491.
Operating activities used $11,093 the nine months ended September 30, 2012. We
received proceeds of $28,818 from related parties and proceeds of $150,000 from
convertible debt, but made repayments of $169,911 for related party payables and
$20,000 for a factoring line, which accounted for our negative financing
Loans and Debt Service
We have no existing bank debt. At September 30, 2012, $243,742 was owed to a
factoring company. We are currently seeking an investment of a minimum of
$2,000,000 either in the form of subordinated debt or through the issue of
common or preferred equity.
Capital Requirements: 2012-2013
We are seeking to raise an additional $2.0 - $5.0 million in capital. Management
is currently in discussions with several potential funding sources and is
optimistic that a transaction can be concluded prior to the end of Q4 2012.
Operating expenses before interest is expected to gradually increase, based on
the sales growth and related support requirements, to approximately $ 325,000
per month by the end of Q2 2013. Initial pro forma profits beginning in Q1 2013
and cash flow breakeven occurs in Q2 2013.
The proceeds of our capital raise will be used primarily to fund additional
market development, sales & marketing & services staffing, product enhancement
and new development, receivable funding, G&A and to reduce debt obligations.
We are projecting to be cash flow positive in Q2 2013. However, to give further
assurance of adequate growth capital, we will explore the financing of our
accounts receivable, securing an additional bank line of credit or a capital
lease line to assist with funding its monthly cash flow fluctuations and other
working capital requirements.
The revenue projections are based on the best conservative estimate of
management. While market acceptance and pricing are not likely to present any
material challenges to revenue growth, sales cycles within the enterprise and
institutional sectors tend to be less predictable and timing of sales growth may
ultimately be slower or faster than forecast. As a result, cash flow projections
may be negatively or positively impacted. The investment capital currently being
solicited will be adequate to meet any interim cash flow shortfalls if the
ramp-up of revenue is slower than projected or to fund more rapid growth if
revenue growth is accelerated.
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Cancellation of Shares
On August 2, 2012, in a Current Report on Form 8-K, we reported the issuance of
4,500,000 shares of common stock and an option to purchase 1,000,000 shares of
Class A Convertible Preferred Stock to our officers and directors. These shares
have been cancelled and returned to treasury.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis. 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, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to
prepare our financial statements. A complete summary of these policies is
included in the notes to our financial statements. In general, management's
estimates are based on historical experience, on information from third party
professionals, and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
We will continue to rely on equity sales of our common shares in order to
continue to fund our business operations. Issuances of additional shares will
result in dilution to existing stockholders. There is no assurance that we will
achieve any additional sales of the equity securities or arrange for debt or
other financing to fund planned acquisitions and exploration activities.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
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