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OVERLAND STORAGE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction, or disappointment with current prospects, as well as words such as "believes," "hopes," "intends," "estimates," "expects," "projects," "plans," "anticipates," and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers', suppliers', and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property (including the outcome of our ongoing patent litigation); general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements, we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading "Risk Factors" in Item 1A of Part II of this report, and set forth in our annual report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission ("SEC") on September 18, 2013 under the caption "Risk Factors" in Item 1A of Part I, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises ("SMEs"), distributed enterprises, and small and medium businesses ("SMBs") to anticipate and respond to data storage requirements. Whether an organization's data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to expend fewer resources on information technology ("IT"), allowing them to focus on being more responsive to the needs of their customers. We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale™ clustered network attached storage ("NAS") products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer® products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN® products are storage area network ("SAN") arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale™, SnapServer®, and SnapSAN® solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO SERIES® and REO SERIES® libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements. Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime. End users of our products include SMEs, SMBs, distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others. 15 -------------------------------------------------------------------------------- Table of Contents Overview This overview discusses matters on which our management primarily focuses in evaluating our financial position and operating performance. Generation of revenue. We generate the majority of our revenue from sales of our data protection products. The balance of our revenue is provided by selling maintenance contracts and rendering related services. The majority of our sales are generated from sales of our branded products through a worldwide channel, which includes systems integrators and value-added resellers. We reported net revenue of $10.6 million for the second quarter of fiscal 2014, compared with $12.6 million for the second quarter of fiscal 2013. We reported net revenue of $21.2 million for the first half of fiscal 2014, compared with $24.3 million for the first half of fiscal 2013. We reported a net loss of $4.3 million, or $0.12 per share, for the second quarter of fiscal 2014 compared with a net loss of $4.3 million, or $0.15 per share, for the second quarter of fiscal 2013. We reported a net loss of $8.9 million, or $0.27 per share, for the first half of fiscal 2014 compared with a net loss of $9.1 million, or $0.33 per share, for the first half of fiscal 2013. Acquisition. On November 1, 2013, we entered into a definitive agreement to acquire Tandberg Data Holdings S.à r.l. ("Tandberg"), a privately held global leader of data storage and data protection solutions in exchange for shares of our common stock. The acquisition was completed on January 21, 2014 and Tandberg became a wholly-owned subsidiary of the Company. The shareholders of Tandberg received, as a result of the acquisition, 47,152,630 shares of our common stock. Liquidity and capital resources. At December 31, 2013, we had cash and a short-term investment of $4.9 million and $4.7 million, respectively, compared to cash of $8.8 million at June 30, 2013. In the first half of fiscal 2014, we incurred a net loss of $8.9 million. Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At December 31, 2013, we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity, subject to certain limitations of accounts receivable, of $4.5 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies. Management has projected that cash on hand, short-term investment, and available borrowings under our credit facility will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects. We may seek debt, equity, or equity-based financing (such as convertible debt) when market conditions permit. As of December 31, 2013, we had working capital of $7.5 million, reflecting an increase in current assets of $0.1 million and a decrease in current liabilities of $0.7 million compared to June 30, 2013. The increase in current assets is primarily attributable to a $4.7 million increase in our short-term investment in Sphere 3D, offset by (i) a $3.9 million decrease in cash, (ii) a $0.3 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based products sold in the Americas and EMEA regions, a (iii) a $0.2 million decrease in inventory, and (iv) a $0.2 million decrease in other current assets primarily related to deferred cost for service contracts. The decrease in current liabilities is primarily attributable to (i) a $0.6 million decrease in deferred revenue, (ii) a $0.4 million decrease in accrued payroll and employee compensation related to a 15% decrease in headcount, (iii) a $0.2 million decrease in accrued warranty, and (iv) a $0.2 million decrease in our stock appreciation rights valuation liability included in accrued payroll and employee compensation. These decreases were offset by an increase of $0.6 million in accounts payable and accrued liabilities related to deferred income tax of $1.0 million for our short-term investment in Sphere 3D, offset by a decrease in accrued liabilities related to operating activities. 16 -------------------------------------------------------------------------------- Table of Contents Recent Developments • On January 16, 2014, we appointed Randy Gast as our Chief Operating Officer. Mr. Gast joined the Company as Senior Vice President of Strategic Alliances and Client Services in August 2012. He has served as Senior Vice President of Worldwide Operations and Service since August 2012. • On January 17, 2014, we completed a private placement of $2.0 million of convertible notes. • On January 17, 2014, we increased our authorized shares of common stock from 90,200,000 shares to 125,000,000 shares, as well as increased the number of shares of our common stock available for award grant purposes under the 2009 Equity Incentive Plan by 7,000,000 shares. • On January 21, 2014, we acquired Tandberg Data Holdings S.à r.l. ("Tandberg"), a privately held global leader of data storage and data protection solutions, in exchange for shares of our common stock. The shareholders of Tandberg received, as a result of the acquisition, 47,152,630 shares of our common stock. Critical Accounting Policies and Estimates We describe our significant accounting policies in Note 1, "Operations and Summary of Significant Accounting Policies," of the notes to the consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2013; and we discuss our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of that report. Unless otherwise described below, there have been no material changes in our critical accounting policies and estimates. Results of Operations The following table sets forth certain financial data as a percentage of net revenue: Three Months Ended Six Months Ended December 31, December 31, 2013 2012 2013 2012 Net revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 65.5 63.5 65.9 64.9 Gross profit 34.5 36.5 34.1 35.1 Operating expenses: Sales and marketing 31.0 34.6 33.1 34.9 Research and development 12.7 12.6 12.5 13.1 General and administrative 33.1 21.9 28.9 23.2 76.8 69.1 74.5 71.2 Loss from operations (42.3 ) (32.6 ) (40.4 ) (36.1 ) Other income (expense), net (3.1 ) (0.8 ) (3.7 ) (1.1 ) Loss before income taxes (45.4 ) (33.4 ) (44.1 ) (37.2 ) Provision for (benefit from) income taxes (4.8 ) 0.5 (2.3 ) 0.5 Net loss (40.6 )% (33.9 )% (41.8 )% (37.7 )% 17-------------------------------------------------------------------------------- Table of Contents A summary of the sales mix by product follows: Three Months Ended Six Months Ended December 31, December 31, 2013 2012 2013 2012 Tape-based products: NEO Series® 28.6 % 33.5 % 27.3 % 33.0 % Disk-based products: REO Series® 0.8 1.4 0.7 1.2 SnapServer® 22.7 17.9 23.4 17.4 23.5 19.3 24.1 18.6 Service 38.0 38.2 40.1 40.6 Spare parts and other 9.9 9.0 8.5 7.8 100.0 % 100.0 % 100.0 % 100.0 % 18-------------------------------------------------------------------------------- Table of Contents The Second Quarter of Fiscal 2014 compared with the Second Quarter of Fiscal 2013 Net Revenue. Net revenue decreased to $10.6 million during the second quarter of fiscal 2014 from $12.6 million during the second quarter of fiscal 2013, a decrease of $2.0 million, or 15.9%. The decline was due to lower revenue from our branded products, primarily as a result of decreased sales volumes in our tape-based products sold in the Americas and EMEA. OEM net revenue, which is primarily made up of service revenue, accounted for 12.8% and 13.5% of net revenues in the second quarter of fiscal 2014 and 2013, respectively. Product Revenue Net product revenue decreased to $6.6 million during the second quarter of fiscal 2014 from $7.8 million during the second quarter of fiscal 2013. The decrease of approximately $1.2 million, or 15.4%, was associated with a decrease in sales of our NEO® products of $1.2 million primarily related to a decrease in sales of our S-series and add-on drives. Service Revenue Net service revenue decreased to $4.0 million during the second quarter of fiscal 2014 from $4.8 million during the second quarter of fiscal 2013. The decrease of approximately $0.8 million, or 16.7%, was primarily due to decreased service revenue from our extended service contracts primarily related to lower tape-based product sales. Gross Profit. Overall gross profit decreased to $3.7 million during the second quarter of fiscal 2014 compared to $4.6 million during the second quarter of fiscal 2013. Gross margin at 34.5% for the second quarter of fiscal 2014 decreased from 36.5% for the second quarter of fiscal 2013. Product Revenue Gross profit on our products during the second quarter of fiscal 2014 was $1.2 million compared to $1.4 million during the second quarter of fiscal 2013. The decrease of $0.2 million, or 14.3%, was primarily due to decreased sales volumes of tape-based products. Gross margin on product revenue at 18.9% for the second quarter of fiscal 2014 increased from 18.6% for the second quarter of fiscal 2013. Service Revenue Gross profit on our services during the second quarter of fiscal 2014 was $2.5 million compared to $3.1 million during the second quarter of fiscal 2013. The decrease of $0.6 million, or 19.4%, was primarily due to a decrease in our extended service contracts due to a decrease in tape-based product sales. Gross margin on our services at 59.9% for the second quarter of fiscal 2014 decreased from 65.4% for the second quarter of fiscal 2013. 19 -------------------------------------------------------------------------------- Table of Contents Share-based Compensation Expense. During the second quarter of fiscal 2014 and 2013, we recorded share-based compensation expense of approximately $0.8 million and $1.3 million, respectively. Share-based compensation expense for the third quarter of fiscal 2014 is expected to be approximately $1.0 million. The Company recorded the following compensation expense related to its share-based compensation awards (in thousands): Three Months Ended December 31, 2013 2012 Cost of product sales $ 30 $ 33 Sales and marketing (68 ) 262 Research and development 80 81 General and administrative 794 875 $ 836 $ 1,251 Sales and Marketing Expense. Sales and marketing expense in the second quarter of fiscal 2014 decreased to $3.3 million from $4.4 million during the second quarter of fiscal 2013. The decrease of $1.1 million, or 25.0%, was primarily due to a decrease of $0.5 million in employee and related expenses associated with a decrease in average headcount, a decrease of $0.2 million in public relations and advertising expense, including contractor fees, and a decrease of $0.3 million in share-based compensation primarily related to the departure of an officer. Research and Development Expense. Research and development expense in the second quarter of fiscal 2014 decreased to $1.4 million from $1.6 million during the second quarter of fiscal 2013. The decrease of $0.2 million, or 12.5%, was primarily due to a decrease in employee and related expenses associated with a decrease in average headcount. General and Administrative Expense. General and administrative expense in the second quarter of fiscal 2014 increased to $3.5 million from $2.8 million during the second quarter of fiscal 2013. The increase of $0.7 million, or 25.0%, was primarily a result of an increase of $0.8 million in legal and advisory expenses primarily related to our acquisition of Tandberg in January 2014, offset by a $0.1 million decrease in share-based compensation. Interest Expense. Interest expense in the second quarter of fiscal 2014 increased to $269,000 from $46,000 during the second quarter of fiscal 2013. The increase was related to interest expense for the convertible notes we sold in February 2013 and November 2013. Other Income (Expense), Net. During the second quarter of fiscal 2014, we incurred other expense, net, of $62,000 compared to $47,000 of expense, net, during the second quarter of fiscal 2013. The change was primarily due to an increase in realized foreign currency exchange losses during the second quarter of fiscal 2014 due to currency fluctuations. The First Half of Fiscal 2014 compared with the First Half of Fiscal 2013 Net Revenue. Net revenue decreased to $21.2 million during the first half of fiscal 2014 compared to $24.3 million during the first half of fiscal 2013, a decrease of $3.1 million, or 12.8%. The decline was primarily due to a decrease of $1.4 million from our branded channel, and a decrease of $1.4 million in service revenue. The decrease in net revenue was attributable to decreased sales volumes primarily in our tape-based products sold in the Americas and EMEA regions. Our sole OEM customer represented approximately 12.5% of net revenue in the first half of fiscal 2014 compared to 12.6% of net revenue in the first half of fiscal 2013. 20 -------------------------------------------------------------------------------- Table of Contents Product Revenue Net product revenue decreased to $12.7 million during the first half of fiscal 2014 compared to $14.4 million during the first half of fiscal 2013. The decrease of $1.7 million, or 11.8%, was primarily associated with a decrease of $2.2 million in tape-based products sold in the Americas and EMEA regions, offset by an increase of $0.6 million in disk-based products sold in the Americas and EMEA regions. Service Revenue Net service revenue decreased to $8.5 million in the first half of fiscal 2014 compared to $9.9 million during the first half of fiscal 2013. The decrease of $1.4 million, or 14.1%, was primarily due to a decrease in our extended service contracts primarily related to lower tape-based product sales in EMEA and the Americas regions. As a percentage of total revenue, service revenue remained relatively constant at 40.1% for the first half of fiscal 2014 compared to 40.7% for the first half of fiscal 2013. Gross Profit. Gross profit in the first half of fiscal 2014 decreased to $7.2 million compared to $8.5 million in the first half of fiscal 2013. Gross margin decreased to 34.1% in the first half of fiscal 2014 compared to 35.1% in the first half of fiscal 2013. Product Revenue Gross profit on our products was constant at $2.0 million for the first half of fiscal 2014 and the first half of fiscal 2013. Gross margin on our products was 15.7% for the first half of fiscal 2014 compared to 14.1% for the first half of fiscal 2013. Service Revenue Gross profit on our services was $5.2 million during the first half of fiscal 2014 compared to $6.5 million in the first half of fiscal 2013. The decrease of $1.3 million was primarily due to a decrease in our extended service contracts. Gross margin on service at 61.5% for the first half of fiscal 2014 decreased from 65.8% for the first half of fiscal 2013. Share-based Compensation. During the first half of fiscal 2014 and 2013, we recorded share-based compensation expense of approximately $1.7 million and $2.5 million, respectively. The following table summarizes share-based compensation by income statement caption (in thousands): Six Months Ended December 31, 2013 2012 Cost of product sales $ 48 $ 68 Sales and marketing 173 512 Research and development 144 160 General and administrative 1,381 1,764 $ 1,746 $ 2,504 Sales and Marketing Expenses. Sales and marketing expenses decreased to $7.0 million during the first half of fiscal 2014 compared to $8.5 million during the first half of fiscal 2013. The decrease of approximately $1.5 million, or 17.6%, was primarily a result of a decrease of $0.7 million in employee and related expenses associated with an decrease in average headcount, a decrease of $0.4 million in public relations and advertising expense, and a decrease of $0.3 million in share-based compensation expense related to the departure of an officer. Research and Development Expenses. Research and development expenses decreased to $2.7 million during the first half of fiscal 2014 compared to $3.2 million during the first half of fiscal 2013. The decrease of approximately $0.5 million, or 15.6%, 21 -------------------------------------------------------------------------------- Table of Contents was primarily a result of a decrease of $0.5 million in employee and related expenses associated with a decrease in average headcount. General and Administrative Expenses. General and administrative expenses increased to $6.1 million during the first half of fiscal 2014 compared to $5.6 million for the first half of fiscal 2013. The increase of approximately $0.5 million, or 8.9%, was primarily a result of an increase of $1.0 million in legal and advisory expenses primarily related to our acquisition of Tandberg in January 2014 and our on-going patent infringement lawsuits, offset by a $0.4 million decrease in share-based compensation primarily related to the departure of an officer. Interest Expense. Interest expense increased to $0.6 million during the first half of fiscal 2014 compared to $0.1 million during the first half of fiscal 2013. The increase of approximately $0.5 million was related to interest expense for the convertible notes we sold in February 2013 and November 2013. Liquidity and Capital Resources At December 31, 2013, we had cash and a short-term investment of $4.9 million and $4.7 million, respectively, compared to cash of $8.8 million at June 30, 2013. In the first half of fiscal 2014, we incurred a net loss of $8.9 million. Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At December 31, 2013, we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity, subject to certain limitations of accounts receivable, of $4.5 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies. As of December 31, 2013, we had working capital of $7.5 million, reflecting an increase in current assets of $0.1 million and a decrease in current liabilities of $0.7 million compared to June 30, 2013. The increase in current assets is primarily attributable to a $4.7 million increase in our short-term investment in Sphere 3D, offset by (i) a $3.9 million decrease in cash, (ii) a $0.3 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based products sold in the Americas and EMEA regions, a (iii) a $0.2 million decrease in inventory, and (iv) a $0.2 million decrease in other current assets primarily related to deferred cost for service contracts. The decrease in current liabilities is primarily attributable to (i) a $0.6 million decrease in deferred revenue, (ii) a $0.4 million decrease in accrued payroll and employee compensation related to a 15% decrease in headcount, (iii) a $0.2 million decrease in accrued warranty, and (iv) a $0.2 million decrease in our stock appreciation rights valuation liability included in accrued payroll and employee compensation. These decreases were offset by an increase of $0.6 million in accounts payable and accrued liabilities related to deferred income tax of $1.0 million for our short-term investment in Sphere 3D, offset by a decrease in accrued liabilities related to operating activities. Management has projected that cash on hand, short-term investment, and available borrowings under our credit facility will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects. We may seek debt, equity, or equity-based financing (such as convertible debt) when market conditions permit. As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2013 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. During the first half of fiscal 2014, we used net cash in operating activities of $8.0 million, compared to $6.4 million in the first half of fiscal 2013. The use of cash during the first half of fiscal 2014 was primarily a result of our net loss of $8.9 million 22 -------------------------------------------------------------------------------- Table of Contents offset by $1.9 million in non-cash items, which were share-based compensation, deferred income tax benefit, depreciation and amortization. In addition, we had decreases in accounts receivable, inventory, and accrued liabilities due to lower sales. Net cash used in investing activities was $0.7 million during the first half of fiscal 2014 and first half of fiscal 2013. During the first half of fiscal 2014 and 2013, capital expenditures totaled $0.5 million and $0.7 million, respectively. In the first half of fiscal 2014, such expenditures were primarily associated with the implementation of a new enterprise resource planning system and equipment for quality assurance testing. In the first half of fiscal 2013, such expenditures were associated with machinery and equipment to support new product introductions. During the first half of fiscal 2014, intangible assets totaled $250,000 and related to a technology license agreement. Net cash provided by financing activities was $4.8 million during the first half of fiscal 2014, compared to net cash used of $0.3 million during the first half of fiscal 2013. During the first half of fiscal 2014, we received gross proceeds of $5.0 million from the sale of our convertible notes, offset by $0.2 million paid for taxes for net settlement of restricted stock units. During the first half of fiscal 2013, $0.4 million was paid for taxes for net settlement of restricted stock units, offset by proceeds received of $145,000 from ESPP purchases. Inflation Inflation has not had a significant impact on our operations during the periods presented. Historically, we have been able to pass on to our customers increases in raw material prices caused by inflation. If at any time we cannot pass on such increases, our margins could suffer. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements or significant guarantees to third parties that are not fully recorded in our consolidated condensed balance sheet or fully disclosed in the notes to our consolidated condensed financial statements. Recently Issued Accounting Pronouncements See Note 11 to our consolidated condensed financial statements for information about recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk from changes in foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to our normal operating and funding activities. Historically, we have not used derivative instruments or engaged in hedging activities. Foreign Currency Risk. We conduct business on a global basis and essentially all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and are expected to continue to represent a significant portion of sales. Our wholly-owned subsidiaries in the United Kingdom, France, and Germany incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely impact overall expected results. The effect of exchange rate fluctuations on our results of operations during the first half of fiscal 2014 and 2013 resulted in losses of $224,000 and $189,000, respectively, to our consolidated condensed financial statements. Item 4. Controls and Procedures. Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15 23 -------------------------------------------------------------------------------- Table of Contents (e) and 15d-15(e) under the Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |