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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

EXCHANGE ACT

Delaware		33-0224167
(State or Other Jurisdiction of Incorporation or		(IRS Employer Identification No.)
Organization)

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

 

PART I.		FINANCIAL INFORMATION			3
		ITEM 1.		FINANCIAL STATEMENTS	3
				Condensed Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008	3
				Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 (unaudited)	4
				Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)	5
				Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2009 and 2008 (unaudited)	6
				Notes to unaudited Condensed Consolidated Financial Statements	7
		ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
		ITEM 4.		Controls and Procedures	28
PART II.		OTHER INFORMATION			29
		ITEM 1A.		Risk Factors	29
		ITEM 6.		Exhibits	31
SIGNATURES					32

		March 31, 2009				December 31, 2008
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	376			$	171
Accounts receivable, net of allowance for doubtful accounts of $28 (unaudited) and $28 at March 31, 2009 and December 31, 2008, respectively			295				503
Inventory, net			70				19
Other current assets			163				191
Total Current Assets			904				884
Property and equipment, net			84				108
Other assets			176				37
Pension assets			654				682
Intangible assets, net of accumulated amortization			106				110
Goodwill			3,416				3,416
Total Assets		$	5,340			$	5,237
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	2,319			$	2,388
Deferred revenue			901				872
Billings in excess of costs and estimated earnings on uncompleted contracts			153				279
Accrued expenses			1,628				1,530
Notes payable to related parties			110				98
Total Current Liabilities			5,111				5167
Secured note payable, net of discount			485				—
Additional financing obligation, net of discount			440				—
Pension obligation			1,073				1,102
Total Liabilities			7,109				6,269
Shareholders’ equity:
Preferred stock, authorized 4,000,000 shares:
Series B convertible redeemable preferred stock, $0.01 par value; designated 750,000 shares, 389,400 shares issued, and 239,400 shares outstanding at March 31, 2009 and December 31, 2008; liquidation preference $645 and $632 at March 31, 2009 and December 31, 2008, respectively			2				2
Series C convertible non-redeemable preferred stock, $0.01 par value; designated 3,500 shares, 2,500 shares issued, and 2,200 shares outstanding at March 31, 2009 and December 31, 2008; liquidation preference $2,647 and $2,604 at March 31, 2009 and December 31, 2008, respectively			—				—
Series D convertible non-redeemable preferred stock, $0.01 par value; designated 3,000 shares, 2,198 shares issued, and 2,198 shares outstanding at March 31, 2009 and December 31, 2008; liquidation preference $2,472 and $2,428 at March 31, 2009 and December 31, 2008, respectively			—				—
Common stock, $.01 par value, 50,000,000 shares authorized; 18,163,487 (unaudited) and 18,163,487 shares issued at March 31, 2009 and December 31, 2008, respectively, and 18,156,783 (unaudited) and 18,156,783 shares outstanding at March 31, 2009 and December 31, 2008, respectively			180				180
Additional paid in capital			86,316				86,007
Treasury stock, at cost - 6,704 shares			(64	)			(64	)
Accumulated other comprehensive income			46				44
Accumulated deficit			(88,249	)			(87,201	)
Total Shareholders’ deficit			(1,769	)			(1,032	)
Total Liabilities and Shareholders’ Equity (Deficit)		$	5,340			$	5,237

The accompanying notes are an integral part of these condensed consolidated financial statements.

		THREE MONTHS ENDED MARCH 31,
		2009				2008
Revenues:
Product		$	675			$	777
Maintenance			638				606
			1,313				1,383
Cost of revenues:
Product			284				139
Maintenance			209				315
Gross profit			820				929
Operating expenses:
General & administrative			609				1,101
Sales and marketing			429				667
Research & development			587				897
Depreciation and amortization			33				201
			1,658				2,866
Loss from operations			(838	)			(1,937	)
Interest expense (income), net			131				(5	)
Change in fair value of financing obligation			90				—
Other income, net			(11	)			(28	)
Loss from operations before income taxes			(1,048	)			(1,904	)
Income tax expense (benefit)			—				—
Net loss		$	(1,048	)		$	(1,904	)
Preferred dividends			(99	)			(84	)
Amortization of beneficial conversion feature on preferred stocks			—				(1,794	)
Net loss available to common shareholders		$	(1,147	)		$	(3,782	)
Basic and diluted loss per common share — see Note 2:
Continuing operations		$	(0.06	)		$	(0.11	)
Preferred Dividends			—				—
Beneficial conversion feature on preferred stocks			—				(0.11	)
Basic and diluted loss per common share - see Note 2		$	(0.06	)		$	(0.22	)
Weighted-average shares outstanding (basic and diluted)			18,156,783				17,836,698

		Three Months Ended March 31,
		2009				2008
Cash flows from operating activities
Net loss		$	(1,048	)		$	(1,904	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			33				201
Amortization of debt discount and debt issuance costs			105				—
Change in fair value of additional financing obligation			90				—
Stock based compensation			69				92
Change in assets and liabilities
Accounts receivable, net			208				(208	)
Inventory, net			(51	)			(95	)
Other assets			28				(53	)
Pension assets			28				(63	)
Accounts payable			(69	)			639
Accrued expenses			99				(84	)
Deferred revenue			29				352
Billings in excess of costs and estimated earnings on uncompleted contracts			(127	)			—
Pension obligation			(30	)			62
Total adjustments			412				843
Net cash used in operating activities			(636	)			(1,061	)
Cash flows from investing activities
Purchase of property and equipment			(5	)			(26	)
Acquisition of business, net of cash acquired			—				(159	)
Net cash used in investing activities			(5	)			(185	)
Cash flows from financing activities
Proceeds from issuance of notes payable with warrants			1,000				—
Financing issuance costs of notes payable			(155	)			—
Proceeds from exercised stock purchase warrants			—				542
Net cash provided by financing activities			845				542
Effect of exchange rate changes on cash			1				(39	)
Net increase (decrease) in cash and cash equivalents			205				(743	)
Cash and cash equivalents at beginning of period			171				1,044
Cash and cash equivalents at end of period		$	376			$	301
Supplemental disclosure of cash flow information:
Cash paid for interest		$	—			$	—
Cash paid for income taxes		$	—			$	—
Summary of non-cash investing and financing activities:
Warrants issued with notes payable		$	241			$	—
Discount on note payable		$	328			$	—
Beneficial conversion feature of series C and D preferred stock		$	—			$	1,794

		THREE MONTHS ENDED MARCH 31,
		2009				2008
Net loss		$	(1,048	)		$	(1,904	)
Other comprehensive loss:
Foreign currency translation adjustment			2				(39	)
Comprehensive loss		$	(1,046	)		$	(1,943	)

The Company operates in markets that are emerging and highly competitive. There is no assurance that the Company will operate at a profit or generate positive cash flows in the future.

 

 

 

 

 
 

 

Potential Dilutive Securities:		Number of Common Shares Convertible into at March 31, 2009				Number of Common Shares Convertible into at March 31, 2008
Restricted stock grants			180,000				—
Convertible notes payable			205,255				—
Convertible preferred stock			10,213,156				3,633,384
Stock options			2,306,288				2,127,954
Warrants			14,971,167				6,721,385

(Amounts in thousands, except  share and per share amounts)		Three Months Ended March 31,
		2009				2008
Numerator for basic and diluted earnings per share:
Net loss from operations		$	(1,048	)		$	(1,904	)
Preferred dividends			(99	)			(84	)
Beneficial conversion feature on preferred stocks			—				(1,794	)
Net loss from operations available to common shareholders		$	(1,147	)		$	(3,782	)
Denominator for basic and diluted earnings per share — weighted-average shares outstanding			18,156,783				17,836,698
Basic and diluted income (loss) per share:
Loss from operations		$	(0.06	)		$	(0.11	)
Preferred dividends			—				—
Beneficial conversion feature on preferred stocks			—				(0.11	)
Net loss available to common shareholders		$	(0.06	)		$	(0.22	)

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

		Fair Value at March 31, 2009
($ in thousands)		Total				Level 1				Level 2				Level 3
Assets:
Pension assets		$	654			$	654			$	—			$	—
Totals		$	654			$	654			$	—			$	—
Liabilities:
Secured promissory note		$	485			$	—			$	—			$	485
Additional financing obligation		$	440			$	—			$	—			$	440
Totals		$	925			$	—			$	—			$	925

										Pro Rata			Impairment
										Reduction of			Charge on						Amortization
										Sol Logic Assets			Sol Logic						Recorded
										From Purchase			Intangible						During Three
				Net Balance at			Amortization			Accounting			Assets Recorded			Net Balance at			Months Ended			Net Balance at
		Amortization		December 31,			Recorded			Contingency			at December 31,			December 31,			March 31,			March 31,
($ in thousands)		Period		2007			During 2008			Resolution			2008			2008			2009			2009
Technology		5 years		$	2,018		$	(420	)	$	(940	)	$	(658	)	$	-		$	-		$	-
Trademark and Trade names		14.5 years		$	126		$	(16	)	$	-		$	-		$	110		$	(4	)	$	106
Customer relationship		5 years		$	93		$	(19	)	$	(43	)	$	(30	)	$	-		$	-		$	-
Non-Compete Agreement		3 years		$	200		$	(69	)	$	(77	)	$	(54	)	$	-		$	-		$	-
Patents		4 years		$	-		$	-		$	-		$			$	-					$	-
Totals				$	2,437		$	(525	)	$	(1,060	)	$	(742	)	$	110		$	(4	)	$	106

In 2008, the Company recorded an impairment charge of approximately $742,000 related to our intangible assets related to the acquisition of Sol Logic in 2007.  This charge reflects the amount by which the carrying value of this asset exceeded its estimated fair value determined by the assets’ future discounted cash flows.  The impairment charge was recorded as a component of Operating expenses in the consolidated Statement of Operations for 2008.  We recorded no impairment losses for long-lived or intangible assets during the three months ended March 31, 2009. At March 31, 2009, the EPI trademark and trade name is the Company’s only remaining definite-lived intangible asset.

($ in thousands)		Total
BBa Balance of Goodwill as of January 1, 2008		$	4,452
Goo Goodwill acquired			—
Don Derecognition of goodwill resulting from amended purchase accounting agreement			(1,036	)
Bala Balance of Goodwill as of December 31, 2008		$	3,416
De-  Goodwill acquired			—
Im    Impairment losses			—
Bala Balance of Goodwill as of March 31, 2009		$	3,416

 

($ in thousands)		March 31,  2009				December 31,  2008
Costs incurred on uncompleted contract		$	138			$	108
Estimated earnings			493				397
			631