Interim / Quarterly Report • Aug 6, 2014
Interim / Quarterly Report
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Herndon, VA and Oslo, Norway – August 6, 2014 – Apptix® (OSE: APP), the premier provider of hosted business communication, collaboration, and IT solutions, today announced its unaudited financial results for the three and six months ended June 30, 2014.
Overview of the second quarter and year to date results:
Apptix entered 2014 with high expectations for revenue growth and with that as a top priority. However, the Company has been unable to meet these expectations as timing and dependency on a limited number of channel relationships has stalled the Company's efforts during the first half of 2014. Additionally, the Company continued to struggle to convert backlog (committed users, but not yet on-boarded) into billable revenue, as partners remain measured, balancing the complexities of user migrations with other resource allocation priorities. As a result of the slower pace of on-boarding during the first half of 2014, billable users grew only 7% to 429,000 as compared to December 2013 levels. Further challenging the Company's efforts in driving top line growth is the fact that new billable users carry primarily lower wholesale ARPU rates while churned users tend to be direct customers carrying higher retail ARPU rates. While billable users continue to grow (albeit at slower than anticipated rates), as a result of this rate discrepancy, revenue has declined to USD 9.9 million over the past two quarters.
Driving growth in both partners with an existing user base and partners new to the Cloud is required to ensure consistent quarterly growth in both bookings and revenue. Accordingly, the Company has fully aligned its sales and marketing efforts around its "channel first" strategy. While the Company appeared to gain momentum in signing new partners in the second half of 2013, increasing competitive and economic pressures have slowed this progress during the first half of 2014. The Company had bookings of USD 564 thousand of QRR in the first half of 2014 down 39% compared to the second half of 2013.
Backlog as of June 30, 2014 was USD 0.9 million. Based upon current implementation plans, the Company anticipates approximately 25% of the June 30 backlog will be on-boarded during the remainder of 2014. However, given the growing lead-time being experienced to on-board new partners (and their existing user base) and the consistent (albeit controlled) rate of user churn along with the disparity in new wholesale billable users and churn that is primarily higher retail rate ARPU, the Company does not anticipate a return to revenue growth before the end of 2014.
"The first half of 2014 has been a very challenging period as we have struggled with increasing onboarding time frames while sales momentum has slowed," said Dave Ehrhardt, President & CEO of Apptix. "However, we continue to believe that our Channel first strategy, which we have previously acknowledged will result in uneven progress due to the size and limited number of partner opportunities we are pursuing, is the most direct path to consistent revenue growth while managing the Company's cash flows to a neutral to positive level. In building Apptix, we have created a flexible and motivated organization that has demonstrated the ability to adapt and overcome challenges in the past, and we are confident we will continue to do so in the future."
Revenues totaled USD 9.9 million for the three months ended June 30, 2014, representing a 1.8% decrease quarter over quarter and 6.2% year over year. Revenues for the six months ended June 30, 2014 totaled USD 19.9 million also down 6% from the same period in 2013. The decline in revenues for all periods presented was primarily due to the slower than anticipated on-boarding of the Company's December 31, 2013 backlog. Customers and partners have been measured and cautious with on-boarding schedules as they look to balance migration complexities along other initiatives within their business operations. As a result, the new revenues on-boarded during the second quarter and first half of 2014 were not able to offset the typical revenue churn within the Company's base business.
ARPU was USD 7.61, down 5% quarter over quarter and 17% year over year due to a combination of price concessions related to conversions to longer term contracts and a shift to a wholesale channel model which typically carries lower revenue per user fees along with user churn.
Operating expenses (including depreciation and amortization) totaled USD 6.4 million during the second quarter of 2014, down 2.6% quarter over quarter and down 9.5% year over year. The decreases were primarily due to lower staffing related costs, marketing expenses, and maintenance related expenses. Total operating expenses for the six months ended June 30, 2014 were USD 13.1 million, also down of 8.7% from the same period in 2013.
EBIT for the second quarter 2014 was USD 398 thousand, compared to USD 310 thousand in the first quarter of 2014 and USD 503 thousand during the second quarter of 2013. EBIT for the six months ended June 30, 2014 was USD 708 thousand, compared to USD 1.2 million during the comparable period in 2013, a decrease of 42%. The Company recorded Net Income for the second quarter of 2014 of USD 32 thousand compared to Net Income of USD 70 thousand in the first quarter of 2014 and USD 175 thousand in the second quarter of 2013. The main drivers for the decline in net profit was a combination of lower revenues and resulting gross margin along with higher interest related costs associated with the Company's second quarter 2014 user capacity (capex) purchase.
For the six months ended June 30, 2014, the Company recorded a Net Income of USD 102 thousand as compared to Net Income of USD 541 thousand during the comparable period in 2013. Fluctuations in EBIT and Net Income during the first six months of 2014 were primarily driven by user churn that is being experienced ahead of revenue that is expected to be provided from the Company's current backlog and current year bookings.
The Company's user churn of 10 to 12% annually remains competitive in the marketplace; however user churn tends to take place ratably throughout the year while the implementation of the bookings is primarily driven by customer or partner schedules which can be impacted by a number of variables including a cautious or measured approach and the allocation of internal resources by the customer/partner.
Cash generated by operating activities, including the impact of changes in currency rates, totaled USD 707 thousand during the second quarter of 2014 compared to USD 328 thousand during the first quarter of 2014 and USD 897 thousand during the second quarter of 2013. For the first half of 2014, cash generated by operating activities, including the impact of changes in currency rates, totaled USD 1.0 million, down from prior year levels of USD 2.1 million. Cash flow fluctuations follow the EBIT and Net Income fluctuations discussed above.
Equipment purchases, net of financings under equipment leases, during the second quarter of 2014 were USD 4 thousand compared to USD 59 thousand in the first quarter of 2014 and USD 34 thousand in the second quarter of 2013. Equipment purchases, net of financings under equipment leases, during the first half of 2014 were USD 63 thousand compared to USD 85 thousand during the first half of 2013. During the second quarter of 2014, the Company expanded user capacity with the purchase of approximately USD 3.7 million in storage and servers. This purchase was funded via a financial lease agreement and provides the Company user capacity in the 800 thousand user range.
Net cash used to satisfy debt and capital lease obligations (including proceeds from the Company's working capital facility) was USD 1.1 million in the second quarter of 2014, as compared to USD 810 thousand in the first quarter of 2014 and USD 877 thousand in the second quarter 2013. Net cash used by financing activities totaled USD 1.9 million during the first six months of 2014 and USD 1.8 million during the same period in 2013.
The Company closed the second quarter of 2014 with USD 2.2 million in cash and USD 4.7 million outstanding on its working capital facility. There has been no change in the amount outstanding on the Company's working capital facility during 2014. As of June 30, 2014, the Company had approximately USD 3.2 million of combined cash and available borrowing capacity under its working capital facility.
| Three Months Ended | ||||
|---|---|---|---|---|
| June 30, 2014 | June 30, 2013 | |||
| (Amounts in USD 1,000) | IFRS | IFRS | ||
| Operating Revenues | ||||
| Recurring Revenues | 9,689 | 10,197 | ||
| Other Revenues | 163 | 310 | ||
| Total Operating Revenues | 9,852 | 10,507 | ||
| Total Cost of Sales | 3,012 | 2,883 | ||
| Gross Profit | 6,840 | 7,624 | ||
| Operating Expenses | ||||
| Employee Compensation and Benefits | 3,383 | 3,733 | ||
| Other Operational and Administrative Costs | 1,980 | 2,421 | ||
| Depreciation and Amortization | 1,079 | 967 | ||
| Total Operating Expenses | 6,442 | 7,121 | ||
| Operating Income | 398 | 503 | ||
| Other Expense | ||||
| Interest, net | (366) | (286) | ||
| Total Other Expense | (366) | (286) | ||
| Income Before Income Taxes | 32 | 217 | ||
| Income Tax Expense | - | (42) | ||
| Net Income for the Period | 32 | 175 | ||
| Earnings Per Share: | Basic | 0.00 | 0.00 | |
| Diluted | 0.00 | 0.00 | ||
| Weighted Average Common Shares Outstanding | 82,203 | 81,430 |
| Six Months Ended | ||||
|---|---|---|---|---|
| June 30, 2014 | June 30, 2013 | |||
| (Amounts in USD 1,000) | IFRS | IFRS | ||
| Operating Revenues | ||||
| Recurring Revenues | 19,514 | 20,702 | ||
| Other Revenues | 373 | 513 | ||
| Total Operating Revenues | 19,887 | 21,215 | ||
| Total Cost of Sales | 6,126 | 5,696 | ||
| Gross Profit | 13,761 | 15,519 | ||
| Operating Expenses | ||||
| Employee Compensation and Benefits | 6,809 | 7,663 | ||
| Other Operational and Administrative Costs | 4,065 | 4,734 | ||
| Depreciation and Amortization | 2,179 | 1,906 | ||
| Total Operating Expenses | 13,053 | 14,303 | ||
| Operating Income | 708 | 1,216 | ||
| Other Expense | ||||
| Interest, net | (606) | (592) | ||
| Total Other Expense | (606) | (592) | ||
| Income Before Income Taxes | 102 | 624 | ||
| Income Tax Expense | - | (83) | ||
| Net Income for the Period | 102 | 541 | ||
| Earnings Per Share: | Basic | 0.00 | 0.01 | |
| Diluted | 0.00 | 0.01 | ||
| Weighted Average Common Shares Outstanding | 82,166 | 81,520 |
| Interim Consolidated Statement of Comprehensive Income | ||||
|---|---|---|---|---|
| Three Months Ended | ||||
| (Amounts in USD 1,000) | June 30, 2014 IFRS |
June 30, 2013 IFRS |
||
| Income for the Period | 3 2 |
175 | ||
| Exchange Rate Differences on Translation of Foreign Operations Items that may be Reclassified Subsequently to Income Statement |
- - |
7 7 |
||
| Items that will not be Reclassified to Income Statement | - | - | ||
| Total Other Comprehensive Income for the Period | - | 7 | ||
| Total Comprehensive Income (Loss) for the Period | 3 2 |
182 | ||
| Attributed to Equity Holders of Parent | 3 2 |
182 | ||
| Six Months Ended | |||
|---|---|---|---|
| June 30, 2014 | June 30, 2013 | ||
| (Amounts in USD 1,000) | IFRS | IFRS | |
| Income for the Period | 102 | 541 | |
| Exchange Rate Differences on Translation of Foreign Operations | (8) | 2 4 |
|
| Items that may be Reclassified Subsequently to Income Statement | (8) | 2 4 |
|
| Items that will not be Reclassified to Income Statement | - | - | |
| Total Other Comprehensive Income / (Loss) for the Period | (8) | 2 4 |
|
| Total Comprehensive Income for the Period | 9 4 |
565 | |
| Attributed to Equity Holders of Parent | 9 4 |
565 |
| June - 30 | December - 31 | June - 30 | |
|---|---|---|---|
| 2014 | 2013 | 2013 | |
| (Amounts in USD 1,000) | IFRS | IFRS | IFRS |
| ASSETS | |||
| Non-Current Assets | |||
| Intangible Assets | 22,150 | 22,246 | 22,481 |
| Total Intangible Assets, net | 22,150 | 22,246 | 22,481 |
| Property, Plant and Equipment, net | 10,831 | 8,534 | 9,228 |
| Total Non-Current Assets | 32,981 | 30,780 | 31,709 |
| Current Assets | |||
| Accounts Receivable | 2,032 | 1,799 | 1,709 |
| Other Current Assets | 165 | 245 | 269 |
| Prepaid Expenses | 1,731 | 937 | 1,619 |
| Cash and Cash Equivalents | 2,173 | 3,124 | 2,569 |
| Total Current Assets | 6,101 | 6,105 | 6,166 |
| TOTAL ASSETS | 39,082 | 36,885 | 37,875 |
| LIABILITIES AND SHAREHOLDERS EQUITY | |||
| Equity Attributed to Equity Holders of the Parent | |||
| Common Stock | 4,666 | 4,666 | 4,666 |
| Paid-in Premium Reserve | 73,437 | 73,437 | 73,437 |
| Other Paid-in Capital | 6,148 | 6,107 | 6,055 |
| Retained Earnings | (62,610) | (62,704) | (62,947) |
| Total Shareholders Equity | 21,641 | 21,506 | 21,211 |
| Long-Term Debt | |||
| Other Long-Term Debt | 4,705 | 7,582 | 7,731 |
| Total Long-Term Debt | 4,705 | 7,582 | 7,731 |
| Current Liabilities | |||
| Trade Accounts Payable | 1,432 | 1,145 | 1,718 |
| Interest Bearing Short-Term Debt | 8,011 | 2,740 | 3,113 |
| Other Current Liabilities | 3,293 | 3,912 | 4,102 |
| Total Current Liabilities | 12,736 | 7,797 | 8,933 |
| TOTAL LIABILITIES AND EQUITY | 39,082 | 36,885 | 37,875 |
| Six Months Ended June 30, | ||
|---|---|---|
| 2014 | 2013 | |
| (Amounts in USD 1,000) | IFRS | IFRS |
| Cash Flows from Operating Activities | ||
| Earnings Before Interest and Taxes | 708 | 1,216 |
| Stock Based Compensation Expense | 41 | 77 |
| Depreciation and Amortization | 2,179 | 1,906 |
| Change in Accounts Receivable | (233) | (64) |
| Change in Trade Accounts Payable | 287 | 412 |
| Change in Other Assets and Liabilities | (1,322) | (702) |
| Cash Flows Provided by Operating Activities | 1,660 | 2,845 |
| Interest Paid | (606) | (593) |
| Income Tax Paid | (10) | (166) |
| Net Cash Flows Provided by Operating Activities | 1,044 | 2,086 |
| Cash Flows from Investing Activities | ||
| Purchases of Intangibles and Property and Equipment | (63) | (85) |
| Cash Flows Used in Investing Activities | (63) | (85) |
| Cash Flows from Financing Activities | ||
| Payments on Capital Lease and Debt Obligations | (1,923) | (1,792) |
| Cash Flows Used in Financing Activities | (1,923) | (1,792) |
| Effect of Exchange Rates on Cash and Cash Equivalents | (9) | 2 |
| Net Change in Cash and Cash Equivalents | (951) | 211 |
| Cash and Cash Equivalents at Beginning of Period | 3,124 | 2,358 |
| Cash and Cash Equivalents at End of Period | 2,173 | 2,569 |
| Foreign Currency |
||||||
|---|---|---|---|---|---|---|
| Share Premium | Other Paid in | Translation | Retained | |||
| (Amounts in USD 1,000) | Share Capital | Reserve | Capital | Reserves | Earnings | Total Equity |
| Equity December 31, 2012 | 4,666 | 73,437 | 5,978 | 3,927 | (67,438) | 20,570 |
| Net Income for the Period | - | - | - | - | 781 | 781 |
| Other Comprehensive Income | - | - | - | - | 26 | 26 |
| Total Comprehensive Income | - | - | - | - | 807 | 807 |
| Equity Element of Expensed Options | - | - | 129 | - | - | 129 |
| Equity December 31, 2013 | 4,666 | 73,437 | 6,107 | 3,927 | (66,631) | 21,506 |
| Net Income for the Period | - | - | - | - | 70 | 70 |
| Other Comprehensive Income | - | - | - | - | (8) | (8) |
| Total Comprehensive Income | - | - | - | - | 62 | 62 |
| Equity Element of Expensed Options | - | - | 18 | - | - | 18 |
| Equity March 31, 2014 | 4,666 | 73,437 | 6,125 | 3,927 | (66,569) | 21,586 |
| Net Income for the Period | - | - | - | - | 32 | 32 |
| Other Comprehensive Income | - | - | - | - | - | - |
| Total Comprehensive Income | - | - | - | - | 32 | 32 |
| Equity Element of Expensed Options | - | - | 23 | - | - | 23 |
| Equity June 30, 2014 | 4,666 | 73,437 | 6,148 | 3,927 | (66,537) | 21,641 |
Apptix (OSE: APP) is the premier provider of hosted business communication, collaboration, and IT solutions to business of all sizes – from SOHO to Fortune 500 – and blue chip channel partners. Apptix is a Cloud services pioneer with over 520,000 users under contract around the world. Apptix's comprehensive portfolio of Cloud solutions includes Microsoft Exchange email, VoIP, Microsoft SharePoint, Microsoft Lync, Servers on Demand, and Enterprise Backup. Services are delivered over a highly reliable network leveraging best-in-class technology, housed in SSAE 16-compliant datacenters, and backed by U.S.-based 24/7 support. For more information, visit www.apptix.com.
| Johan Lindqvist (Chairman) | David Ehrhardt (CEO) | Chris Mack (CFO) |
|---|---|---|
| [email protected] | [email protected] | [email protected] |
| +46 733 55 09 35 | + 1 703 890 2800 | + 1 703 890 2800 |
Effective January 31, 2013, the Company entered into a Sixth Loan Modification Agreement with its bank to increase the borrowing limit of the Company's revolving credit facility to USD 7 million. The amounts available under the working capital facility are subject to a borrowing base formula up to 200% of the Company's Monthly Recurring Revenue. The interest charged on the borrowings is subject to the bank's prime interest rate plus two and one-quarter additional percentage points with a minimum rate of five and one-half percent. The term of the working capital facility expires on January 31, 2015 and the current outstanding balance of USD 4.7 million is presented as a short term obligation. The Company will begin discussions with its financial institution regarding a renewal during the next three to six months.
In June 2014, the Company entered into a Seventh Loan Modification Agreement which lowered the Company's required Fixed Charge Ratios through the remainder of the existing term (January 31, 2015). No other material changes were made the revolving credit facility.
The Company is currently operating in a negative working capital position. The negative working capital position is primarily the result of the current obligations related to equipment finance lease agreements, and deferred revenues related to annual subscription contracts.
As outlined in this report, the Company recorded net income of USD 32 thousand during the second quarter of 2014. Including the effects of exchange rate differences, the Company generated cash of USD 707 thousand during the second quarter from operating activities. Since January 2011, the Company has generated sufficient liquidity from operating cash flows in nine out of thirteen quarters to satisfy the Company's debt and capital lease obligations. The Company believes this positive trend in net income and cash flow from operating activities will continue in the future aside from seasonable working capital fluctuations. Accordingly, with the Company's working capital facility (as noted above) along with current cash reserves, the Company believes it has sufficient liquidity to meet its current and future obligations.
For more information related to this subject, refer to the Company's 2013 Annual Report and Director's Report.
The Company estimates Backlog as the value of future billable revenue related to users not currently onboarded under signed contracts. Realization of Backlog into billable revenue is ultimately dependent upon a number of factors including the timing and availability of Apptix, partner, and/or end customer resources (both technology and labor) required to complete the successful migration of end users from their existing messaging, voice, or collaboration solution. As of June 30, 2014, the Company estimates it has a QRR backlog of USD 0.9 million. However, during the second quarter 2014, a partner notified the Company informally that they may challenge some or all of its commitments, which account for USD 270 thousand of the June 30, 2014 Backlog. The Company believes that it has a valid contractual commitment with this partner.
As described in the Company's Annual Report for 2013 (Note 25), the Company's financial risk exposure includes foreign currency risk, credit risk, interest rate risk, and liquidity risk.
In addition to the above described financials risks, the Company is subject to a variety of operating and market risks including but not limited to:
The Company continues to implement various initiatives designed to enhance operating control and efficiency, including the simplification of the Company's overall technical and operating architecture. The Company has consolidated its multiple operating platforms and data center facilities into two primary data center facilities and platforms. The Company believes the operational efforts taken over the past few years, including its platform consolidation efforts, reduces the Company's exposure of a serious platform outage.
Note 23 in the Company's Annual Report for 2013 provides details of transactions with related parties. As described in Note 23, the Company enters into certain transactions with related parties as part of its ordinary course of business. The transactions include a consulting agreement with its Chairman which is approved annually by the Company's shareholders, a services contract with a former Board member and current shareholder to provide legal services at prevailing market rates and an agreement to provide remuneration fees to three shareholders (who each serve two year terms as elected by shareholders) to be members of the Company's nominating committee. Excluding the aforementioned transactions and the compensation of key management and Board of Directors, there were no other related party transactions during the first half of 2014.
We confirm to the best of our knowledge that the condensed set of interim consolidated financial statements as of June 30, 2014 and for the six month period January 1, 2014 to June 30, 2014 has been prepared in accordance with IAS 34 'Interim Financial Reporting' and gives a true and fair view of the Company's assets, liabilities, financial position and the result for the period viewed in their entirety, and that the interim management report in accordance with the Norwegian Securities Trading Act section 5-6 fourth paragraph includes a fair review of any of the significant events that arose during the six-month period and their effect on the half-yearly financial report, and any significant related parties transactions, and a description of the principal risks and uncertainties for the remaining six months of the year.
/s/Johan Lindqvist /s/ David Ehrhardt Chairman of the Board President and CEO
Board Member Board Member
/s/Terje Rogne /s/Ebba Asly Fahraeus
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