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[March 07, 2013]
B-SCADA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our results of operations should be read together with our financial statements and the related notes, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report on Form 10-Q.
Executive Summary Since 2003, our experience in building and deploying HMI and SCADA Systems has given us a unique perspective and insight into new data visualization possibilities with emerging technologies.
We specialize in the compelling visualization of real-time data. B-Scada has produced exceptional data visualization solutions for manufacturing, power and utilities, automation, and other fields of business making use of HMI (Human Machine Interface) and SCADA (Supervisory Control and Data Acquisition) software products.
Our in-house expertise and experience has provided us the opportunity to partner with companies from various vertical markets, and assist them in developing custom solutions that meet their specific needs. Our goal is to help our clients transfer their real-time production and operational data into actionable information through graphically-compelling, functional, and intuitive user interfaces.
Products and Services Our technology team has more than 50 years of experience in software design and development and has designed, built and delivered, over the years, world-class software solutions. In addition to software development, we also derive income from consulting services and contract development.
Overall Strategic Goals Our goal is to become a leading supplier of HMI and SCADA systems to industry.
Using some of the best talent in the industry, we build our monitoring systems in house and sell them into various vertical markets including building automation, petro chemical, transportation, electricity distribution and EPA emissions monitoring. Smaller firms and Fortune 500 companies have recognized the talent of our technical staff and the unique capabilities of our technology.
This has given us the ability to license portions of our technology to other companies to use in their software systems.
Product Description 'Status Vision Designer(R)' ("Status Designer") was released in January 2009 as an industrial control and monitoring application for heavy industry and manufacturing.
Status Designer falls into the category of a SCADA (Supervisory Control and Data Acquisition) or HMI (Human Machine Interface) software application.
Status Vision Designer(R) is a powerful data visualization software package that allows the user to create highly graphical screens and connect the controls on the screens to real-time data. The screens can then be published and viewed by anyone within the company or from the web.
Status Designer has built-in connectivity to real-time OPC (Open Process Control) data (including OPCUA (Unified Architecture)) and can very easily be extended to bind to other types of data. OPC data is primarily used in the manufacturing and process control industries. The market appeal for Status Designer is its ability to connect to a variety of OPC servers and display real-time data from hundreds of data sources.
We have attracted a number of resellers and system integrators that are now promoting and using 'Status Designer' in commercial settings. We believe that this will result in greater sales and distribution of our software through retail outlets and to original equipment manufacturers ("OEM"s). We are also targeting potential customers to offer customized applications to meet their industry requirements. Status Designer is now being used to monitor one of the largest subway systems in the world in Seoul, South Korea. Status monitors HVAC performance in pharmaceutical manufacturing facilities, electricity distribution, mining equipment and furniture manufacturing. Status is used in various monitoring applications in numerous verticals in the United States and around the world in numerous countries including Germany, Sweden, Taiwan, Kuwait, Malaysia, Chile, Canada, United Kingdom, Italy, Turkey, South Africa, Russia and France.
11 -------------------------------------------------------------------------------- Consulting In addition to sales of Status, we generate revenue by providing consulting services to companies that wish to extend and customize our technology. We also provide development and design services. We also offer training and graphic design services and produce 3D models of equipment and machinery for use in mimics.
From initial consulting services and custom development, to embedding our Aurora software into their solution, we have the expertise and personnel to assist.
Status Designer was designed from the ground up to be extensible. Numerous companies have written custom data sources or asked B-Scada to create custom data sources to provide their real time data into Status Designer.
Technology Licensing In addition to selling our own software products, we also license the technology we have developed to other software companies. Long-term licenses to multinational software companies are a major part of our business. The lead time for our engineers to work with theirs in developing successful integration of our software with their future products is fairly long-from nine months to two years - but the result is a multiyear high revenue license which provides substantial revenue to us for years to come. We have four such agreements in place with Fortune 500 companies, and numerous agreements with smaller firms The products developed using B-Scada's technology include industrial automation solutions, medical applications for use in hospitals, smart grid, HVAC and line of business applications. The relationships established through licensing are very strategic and may lead to acquisitions to prevent competitive companies from having the same strategic benefits.
Growth Strategy B-Scada software can collect vital information of what is happening with the system it is monitoring. This data can be very valuable for such activities as scheduling, predictive maintenance and manufacturing execution. Our growth strategy is to grow our software offerings beyond SCADA and provide a more complete and valuable offering to our customers. These additional software products may be developed in house as the company grows, or added through a business acquisition. We would need to raise capital to finance an acquisition, either through debt or equity public or private offerings. There is no assurance that we will be able to raise capital in an amount necessary to finance such acquisition or on acceptable terms.
Revenue Strategy We are currently generating revenues through the licensing of our technology to different software companies, retailing portions of our technology as software development components, and in the near future, retailing our software solutions to specific vertical markets. We anticipate, in the future, a smaller portion of our revenue will come from consulting services and custom development.
We are currently selling our products directly over the Internet from our website and through resellers to end users and system integrators. We will also target potential customers to offer customized applications to meet their industry requirements.
Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.
Certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's subjective judgments are described below to facilitate a better understanding of our business activities. We base our judgments on our experience and assumptions that we believe are reasonable and applicable under the circumstances.
Revenue Recognition - Our revenues are recognized in accordance with FASB ASC Topic 985-605 "Revenue Recognition" for the software industry. Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable. Revenue from software maintenance contracts and Application Service Provider ("ASP") services are recognized ratably over the lives of the contracts. Revenue from professional services is recognized when the service is provided.
12 --------------------------------------------------------------------------------We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately.
For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
Results of Operations Comparison of the Three Months Ended January 31, 2013 and 2012 The following table sets forth, for the periods indicated, certain items from the statements of operations along with a comparative analysis of ratios of costs and expenses to revenues.
For the three months ended January 31, 2013 2012 (Unaudited) (Unaudited) % of % of Amounts Revenues Amounts Revenues Revenues $ 274,617 100% $ 281,621 100% Operating expenses: Compensation costs $ 168,314 61% $ 166,418 59% Consulting fees $ 1,350 0% $ 650 0% Advertising $ 11,257 4% $ 3,271 1% Professional fees $ 15,041 5% $ 15,590 6% Interest and debt costs $ 4,319 2% $ 5,243 2% Net Income $ 41,571 15% $ 61,629 22% Net income per share - basic and diluted $ -- $ -- Revenues Our revenues for the three months ended January 31, 2013 amounted to $274,617 compared to fiscal 2012 revenues of $281,621. Revenues for the period decreased by approximately $7,000 (2%). During fiscal 2013, we had increases in developmental services and support revenues of $39,000 and $38,000, respectively, which were reduced by decreases in technology licensing revenues of $84,000. We continue to implement our strategic goals to increase revenue from the sales of our products and services. In the first quarter of fiscal 2013, we signed two multi-year license and support fee agreements that in total will be in excess of $2 million dollars over the initial seven year term of the agreements. Service revenues include revenues from fees charged for the implementation of our software products and training of customers in the use of such products. We are currently selling our software over the internet and are marketing our products and services to companies that may want to license or joint venture some of our software applications.
Operating Expenses Our operating expenses consist primarily of compensation costs, advertising and professional services.
Compensation costs consist of payroll and related expenses. Payroll expenses amounted to $168,314 in the three months ended January 31, 2013 compared to $166,418 in the three months ended January 31, 2012. Payroll expenses increased by $1,896 (1%) and 61% of revenues compared to 59% of revenues at January 31, 2012. We continue to manage our payroll costs as we implement our strategic plan.
Advertising costs have increased to $11,257 in the three months ended January 31, 2013 from $3,271 in the three months ended January 31, 2012, an increase of $7,986 primarily from increases in marketing expense. As operations improved we have reinstated our advertising budget since we believe it is necessary to market our products and services in order to accomplish our plan for revenue growth.
13 --------------------------------------------------------------------------------Professional fees of $15,041 in the three months ended January 31, 2013 are comparative with the $15,590 in the three months ended January 31, 2012.
Consulting fees of $1,350 in the three months ended January 31, 2013 are comparative with $650 in the three months ended January 31, 2012.
Interest and Debt Costs Interest expense decreased from $5,243 in the three months ended January 31, 2012 to $4,319 in the three months ended January 31, 2013. Interest expense is incurred on the promissory notes totaling $164,173 with our CEO and $50,000 on outstanding convertible debentures.
Income Taxes The expected tax benefits resulting from pre-tax losses have been fully reserved as we are not able to determine if it is more likely than not that we will be able to realize the tax benefits in the future.
Net Income Net income in the three months ended January 31, 2013 totaled $41,571 (15% of revenues) compared to $61,629 (22% of revenues) in the three months ended January 31, 2012, a decrease of $20,058 (33%) as discussed above.
Liquidity and Capital Resources We fund our operations through sales of our products and services and debt and equity financings.
At January 31, 2013 we had cash and cash equivalents of $409,000 compared to $95,000 at October 31, 2012. The increase of $314,000 is primarily attributable to cash generated from operations.
Cash Flows Net cash provided by operating activities amounted to $318,000 and $204,000 in the three months ended January 31, 2013 and 2012, respectively. Net cash from operations increased as a result of the additional cash and revenues generated in the first quarter of fiscal 2013 from our licensing agreements and service revenues while we managed to maintain operating costs for compensation, advertising and professional fees as discussed above.
In the first quarter of fiscal 2013, cash was used for investing activities for the acquisition of equipment in the amount of $3,856. There were no cash investing activities in the first quarter of fiscal 2012.
In the first quarter of fiscal 2012, cash was used for financing activities by a loan payment to our CEO in the amount of $35,827. There were no cash financing activities in the first quarter of fiscal 2013.
We believe that our cash on hand at January 31, 2013 along with our revenue commitments will be sufficient to fund our operations for at least the next 12 months. We have signed significant licensing agreements and continue to market our products and services in accordance with our strategic business plan. We are also looking to raise additional capital through debt and/or equity financings.
There is no assurance that the income generated from these and future agreements will meet our working capital requirements, or that we will be able to sign significant agreements in the future. There is also no assurance that we will be able to obtain additional capital in the amount or on terms acceptable to us.
Contractual Obligations Not Applicable Off-Balance Sheet Arrangements As of January 31, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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