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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 involves unknown risks and uncertainties. Examples of forward-looking statements include: projections of capital expenditures, competitive pressures, revenues, growth prospects, product development, financial resources and other financial matters. You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential" or the negative of such terms, or other comparable terminology. 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 (Human Machine Interface) and SCADA (Supervisor Control and Data Acquisition) 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, petro chemical, emissions monitoring, building automation and other fields of business making use of HMI and SCADA 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. 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 worldwide 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. Products and Services Our technology team has extensive experience in software design and development and has designed, built and delivered, over the years, world-class software solutions for numerous vertical markets. In addition to software development, we also derive income from consulting services, graphic design and contract development that we offer hand in hand with our software solutions. Product Description 'Status Machine Edition' was released in January 2009 as an industrial control and monitoring application for heavy industry and manufacturing. 'Status Enterprise' is a supervisory level version of Machine Edition which was released in January 2014. The Status products fall into the category of a SCADA (Supervisory Control and Data Acquisition) or HMI (Human Machine Interface) software application. The Status family of products are 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 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 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 the Status product line 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 Machine Edition is now being used to monitor one of the largest subway systems in the world in Seoul, South Korea. Status Machine Edition monitors HVAC performance in pharmaceutical manufacturing facilities, electricity distribution, mining equipment and furniture manufacturing. Status Machine Edition and Status Enterprise are 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. 12 --------------------------------------------------------------------------------Status Enterprise provides greater scalability, data modeling and support for HTML 5 and mobile devices. We do not expect this offering to start generating significant revenue until the end of 2014, as the sales cycles for SCADA products is often several months or more. Consulting In addition to sales of the Status products, we generate revenue by providing consulting services to companies that wish to extend and customize our technology. We provide .NET development and screen design services. We also offer training and graphic design services and produce 3D models of equipment and machinery for use in mimics. 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 providing substantial income for us for years to come. We have several 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. Additional capital may be needed to finance such 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 by licensing portions of our technology to different software companies, technology they use in their software products. These are long term arrangements providing consistent annual revenue to B-Scada. We also sell our SCADA software products to system integrators and commercial customers for visually monitoring and archiving their industrial data. Often, we are asked to provide technical expertise in the form of software development, graphics design and consulting services along with the software we provide our customers. We currently sell our products directly over the Internet from our website and through resellers to end users and system integrators. 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 collectability 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. 13 --------------------------------------------------------------------------------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 April 30, 2014 and 2013 The following tables set 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 April 30, 2014 2013 (Unaudited) (Unaudited) % of % of Amounts Revenues Amounts Revenues RevenuesTechnology licensing and support $ 427,202 84% $ 331,788 75% Commercial software 80,572 16% 108,482 25% Total revenues $ 507,774 100% $ 440,270 100% Operating expenses: Technology licensing and support $ 54,910 11% $ 40,943 9% Commercial software $ 71,646 14% $ 53,350 12% Sales and marketing $ 95,942 19% $ 67,873 15% Research and development $ 21,782 4% $ 16,567 4% General and administrative $ 109,519 22% $ 59,447 14% Interest expense $ 793 -- $ 3,078 1% Net Income $ 150,724 30% $ 197,756 45% Basic earnings per common share $ 0.01 $ 0.01 Diluted earnings per common share $ 0.01 $ 0.01 Revenues Our revenues for the three months ended April 30, 2014 amounted to $507,774 compared to fiscal 2013 revenues of $440,270, an increase of approximately $68,000 (15%). In fiscal 2014, we had increases in technology licensing and support revenues of $95,000 which were offset by a decline in commercial software revenues of $27,000. We entered into two new long-term licensing agreements at the end of the first quarter of fiscal 2013. In fiscal 2014, customer development services from these customers accounted for most of the increase in technology licensing and support revenues. We continue to implement our strategic goals to generate increased revenues from the sales of our products and services, which accounted for the balance of our revenue growth. 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 which may want to license or joint venture some of our software applications. Operating Expenses Technology licensing and support costs and commercial software costs consist primarily of payroll and related expenses. Technology licensing and support costs amounted to $54,910 in the three months ended April 30, 2014 compared to $40,943 in the three months ended April 30, 2013 an increase of $13,967 (34%). Commercial software costs amounted to $71,646 in the three months ended April 30, 2014 compared to $53,350 in the three months ended April 30, 2013 an increase of $18,296 (34%). These increased costs result from our adding personnel to service our new business as well as the anticipated business from the release of Status Enterprise in January 2014. 14 --------------------------------------------------------------------------------As a percentage of technology licensing and support revenues the related costs increased to 13% in fiscal 2014 as compared to 12% of such revenues in fiscal 2013. Commercial software costs were 89% of commercial software revenues in fiscal 2014 compared to 49% in fiscal 2013. This was a result of our decrease in such revenues in fiscal 2014. Overall these costs represented 25% of revenues this period compared to 21% of fiscal 2013 revenues. Sales and marketing costs have increased to $95,942 in the three months ended April 30, 2014 from $67,873 in the three months ended April 30, 2013, an increase of $28,069 (41%). Payroll and related costs increased to $68,150 from $50,864 and advertising and marketing increased to $19,491 from $12,975. As operations continue to improve we have increased our sales and marketing budget since we believe it is necessary to market our products and services in order to accomplish our plan for revenue growth. Research and development costs increased to $21,782 in the three months ended April 30, 2014 from $16,567 in the three months ended April 30, 2013, an increase of $5,215 (31%). Research and development payroll and related costs increased as we continuously work on new features for our products. General and administrative costs increased to $109,519 in the three months ended April 30, 2014 from $59,447 in the three months ended April 30, 2013, an increase of $50,072 (84%). The increase was primarily related to increases in payroll and related costs, which increased to $54,258 from $29,462, repairs and maintenance, which increased $13,443, and professional fees, which increased $7,543. The increases in payroll and professional fees result from increased costs to administer our business as it continues to grow and to properly maintain the financial records necessary for our periodic filings which are required as a public company. The increased repairs and maintenance costs, which should be non-recurring, relate primarily to the relocation to our new office facility in April 2014. Interest and Debt Costs Interest expense decreased from $3,078 in the three months ended April 30, 2013 to $793 in the three months ended April 30, 2014. We paid off both our promissory notes with our CEO ($164,173) and the convertible debenture ($50,000) during fiscal 2013. In April 2014, we incurred interest expense from the mortgage payable on our new office facility. Income Tax Benefit Prior to the year ended October 31, 2013 the deferred tax asset arising from pre-tax losses had been fully reserved as we were not able to determine that it was more likely than not that we would be able to realize the tax benefits in the future. Based on our evaluation of the positive and negative evidence at October 31, 2013, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013. Based on current operations, it is estimated that no further adjustment is necessary at April 30, 2014, but management will review each period to determine if additional reductions to the valuation allowance are warranted and adjust accordingly. Net Income Net income in the three months ended April 30, 2014 totaled $150,724 compared to net income of $197,756 in the three months ended April 30, 2013, a decrease of $47,032 (24%) as discussed above. 15 -------------------------------------------------------------------------------- Results of Operations Comparison of the Six Months Ended April 30, 2014 and 2013 The following tables set 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 six months ended April 30, 2014 2013 (Unaudited) (Unaudited) % of % of Amounts Revenues Amounts Revenues RevenuesTechnology licensing and support $ 697,002 83% $ 501,873 70% Commercial software 146,544 17% 213,014 30% Total revenues $ 843,546 100% $ 714,887 100% Operating expenses: Technology licensing and support $ 80,693 10% $ 59,929 8% Commercial software $ 97,522 12% $ 72,403 10% Sales and marketing $ 172,175 20% $ 117,408 16% Research and development $ 80,597 10% $ 59,857 8% General and administrative $ 235,987 28% $ 156,022 22% Interest expense $ 793 -- $ 7,397 1% Net Income $ 172,213 20% $ 239,327 33% Basic earnings per common share $ 0.01 $ 0.01 Diluted earnings per common share $ 0.01 $ 0.01 Revenues Our revenues for the six months ended April 30, 2014 amounted to $843,546 compared to fiscal 2013 revenues of $714,887, an increase of approximately $129,000 (18%). In fiscal 2014, we had increases in technology licensing and support revenues of $195,000 which were offset by a decline in commercial software revenues of $66,000. We entered into two new long-term licensing agreements at the end of the first quarter of fiscal 2013. In fiscal 2014, custom development services from these customers accounted for most of the increase in technology licensing and support revenues. We continue to implement our strategic goals to generate increased revenues from the sales of our products and services, which accounted for the balance of our revenue growth. 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 which may want to license or joint venture some of our software applications. Operating Expenses Technology licensing and support costs and commercial software costs consist primarily of payroll and related expenses. Technology licensing and support costs amounted to $80,693 in the six months ended April 30, 2014 compared to $59,929 in the six months ended April 30, 2013 an increase of $20,764 (35%). Commercial software costs amounted to $97,522 in the six months ended April 30, 2014 compared to $72,403 in the six months ended April 30, 2013 an increase of $25,119 (35%). These increased costs result from our adding personnel to service our new business as well as the anticipated business from the release of Status Enterprise in January 2014. As a percentage of technology licensing and support revenues the related costs were 12% of such revenues in both fiscal 2014 and 2013. Commercial software costs were 67% of commercial software revenues in fiscal 2014 compared to 34% in fiscal 2013. This was a result of our decrease in such revenues in fiscal 2014. Overall these costs represented 21% of revenues this period compared to 19% of fiscal 2013 revenues. 16 --------------------------------------------------------------------------------Sales and marketing costs have increased to $172,175 in the six months ended April 30, 2014 from $117,408 in the six months ended April 30, 2013, an increase of $54,767 (47%). Payroll and related costs increased to $108,307 from $80,420 and advertising and marketing increased to $41,461 from $24,232. As operations continue to improve we have increased our sales and marketing budget since we believe it is necessary to market our products and services in order to accomplish our plan for revenue growth. Research and development costs increased to $80,597 in the six months ended April 30, 2014 from $59,857 in the six months ended April 30, 2013, an increase of $20,741 (35%). Research and development payroll and related costs increased as we worked on the release of our new product, Status Enterprise, and new features. General and administrative costs increased to $235,987 in the six months ended April 30, 2014 from $156,022 in the six months ended April 30, 2013, an increase of $79,965 (51%). The increase was primarily related to increases in payroll and related costs, which increased to $117,075 from $86,891, repairs and maintenance, which increased $13,865, and professional fees, which increased $12,587. The increases in payroll and professional fees result from increased costs to administer our business as it continues to grow and to properly maintain the financial records necessary for our periodic filings which are required as a public company. The increased repairs and maintenance costs, which should be non-recurring, relate primarily to the relocation to our new office facility in April 2014. Interest and Debt Costs Interest expense decreased from $7,397 in the six months ended April 30, 2013 to $793 in the six months ended April 30, 2014 as we paid off both our promissory notes with our CEO ($164,173) and the convertible debenture ($50,000) during fiscal 2013. In April 2014, we incurred interest expense from the mortgage payable on our new office facility. Income Tax Benefit Prior to the year ended October 31, 2013 the deferred tax asset arising from pre-tax losses had been fully reserved as we were not able to determine that it was more likely than not that we would be able to realize the tax benefits in the future. Based on our evaluation of the positive and negative evidence at October 31, 2013, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013. Based on current operations, it is estimated that no further adjustment is necessary at April 30, 2014, but management will review each period to determine if additional reductions to the valuation allowance are warranted and adjust accordingly. Net Income Net income in the six months ended April 30, 2014 totaled $172,213 compared to net income of $239,327 in the six months ended April 30, 2013, a decrease of $67,114 (28%) as discussed above. Liquidity and Capital Resources We currently fund our operations through sales of our products and services. At April 30, 2014, we had cash and cash equivalents of $806,325 compared to $252,571 at October 31, 2013. The increase of $553,754 is primarily attributable to cash generated from operations reduced by acquisition costs of long-lived assets. Cash Flows Net cash provided by operating activities amounted to $637,745 and $545,828 in the six months ended April 30, 2014 and 2013, respectively. Net cash from operations increased as a result of cash generated from our technology licensing and support revenues while we managed to maintain operating costs as discussed above while we implemented our overall strategic business plan. In fiscal 2014 and 2013, cash was used for investing activities for the acquisition of property and equipment in the amount of $82,720 and $6,870, respectively. Additionally, in fiscal 2014 we purchased a new office facility and incurred a mortgage payable of $127,500, of which we paid $1,271 in principal in April 2014. We relocated in the second quarter of fiscal 2014. We believe that our cash on hand at April 30, 2014 and 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. 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. 17 --------------------------------------------------------------------------------Deferred Tax Asset Valuation Allowance Accounting standards require that we assess whether a valuation allowance should be established against our deferred tax asset based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, we considered both positive and negative evidence as well as other factors which may impact future operating results. From our inception through October 31, 2012, we had established a full valuation allowance on our deferred tax asset because of a lack of sufficient positive evidence to support its realization. At October 31, 2013, based on its evaluation of the positive and negative evidence, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. The positive evidence evaluated as of October 31, 2013 consists of (i) our increased revenues, including the signing of several long term licensing agreements which run through fiscal 2019; (ii) our positive earnings, beginning in fiscal 2011 and increasing in each of fiscal 2012 and 2013; (iii) our ability to maintain operating costs as we have grown revenues; (iv) the utilization of net operating loss carry forwards in the last three fiscal years. The negative evidence evaluated as of October 31, 2013 consists of (i) our history of operating losses from inception through fiscal 2010; (ii) the possibility that a licensing agreement is cancelled or that non licensing revenues will decline; (iii) the possibility that our operating costs will increase. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013. Overall the valuation allowance decreased by approximately $47,000 and $462,000 in the six months ended April 30, 2014 and the year ended October 31, 2013, respectively. Contractual Obligations Not Applicable Off-Balance Sheet Arrangements As of April 30, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition", and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU will be applied using one of two retrospective methods. The effective date will be the first quarter of our fiscal year ended October 31, 2018. We have not determined the potential effects on our financial statements. Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements. |