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SMART ONLINE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
Information set forth in this Quarterly Report on Form 10-Q contains various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, or the Exchange Act and other laws. Forward-looking statements
consist of, among other things, trend analyses, statements regarding future
events, future financial performance, our plan to build our business and the
related expenses, our anticipated growth, trends in our business, the effect of
interest rate fluctuations on our business, the potential impact of litigation
settlements or any future litigation, the potential availability of tax assets
in the future and related matters, the expected decline in revenues from the
termination of contracts, obtaining security clearance and meeting the
compliance requirements necessary to be a qualified vendor for the U.S.
government and the sufficiency of our capital resources including funds
available under our existing credit facility and the future sales of convertible
subordinated notes, all of which are based on current expectations, estimates,
and forecasts, and the beliefs and assumptions of our management. Words such as
"expect," "anticipate," "project," "intend," "plan," "estimate," variations of
such words, and similar expressions also are intended to identify such
forward-looking statements. These forward-looking statements are subject to
risks, uncertainties, and assumptions that are difficult to predict. Therefore,
actual results may differ materially and adversely from those expressed in any
forward-looking statements. Readers are directed to risks and uncertainties
identified under Part II, Item 1A, "Risk Factors," in our Annual Report on Form
10-K for the year ended December 31, 2011 and our subsequent periodic reports
filed with the Securities and Exchange Commission, or SEC, for factors that may
cause actual results to be different than those expressed in these
forward-looking statements. Except as required by law, we undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.
The following discussion is designed to provide a better understanding of our
unaudited financial statements, including a brief discussion of our business and
products, key factors that impacted our performance, and a summary of our
operating results. The following discussion should be read in conjunction with
the unaudited financial statements and the notes thereto included in Part I,
Item 1 of this Quarterly Report on Form 10-Q, and the financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in our 2011 Annual Report. Historical
results and percentage relationships among any amounts in the financial
statements are not necessarily indicative of trends in operating results for any
future periods.
Overview
We develop and market a full range of mobile application software products and
services that are delivered via a SaaS/PaaS model. We also provide website and
mobile consulting services to not-for-profit organizations and businesses.
15
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We have not yet achieved positive cash flows from operations, and our main
sources of funds for our operations are the sale of securities in private
placements, the sale of additional Notes, and bank lines of credit. We must
continue to rely on these sources until we are able to generate sufficient cash
from revenues to fund our operations. We believe that anticipated cash flows
from operations, funds available from our existing credit facility (which
expires May 2013, as described above in Note 3) and additional issuances of
Notes, together with cash on hand, will provide sufficient funds to finance our
operations at least for the next 12 to 18 months, depending on our ability to
achieve strategic goals outlined in our annual operating budget approved by our
Board of Directors. Changes in our operating plans, lower than anticipated
sales, increased expenses, or other events may cause us to seek additional
equity or debt financing in future periods. There can be no guarantee that
financing will be available on acceptable terms or at all. Additional equity
financing could be dilutive to the holders of our common stock, and additional
debt financing, if available, could impose greater cash payment obligations and
more covenants and operating restrictions. The settlement of the Class Action
lawsuit will cause current shareholders to be further diluted due to the
issuance of an additional 1,475,000 shares of our common stock pursuant to the
terms of the Stipulation.
During the third quarter of 2012, the Company began to seek U.S. Secure Facility
Clearance and security clearances for select but undetermined employees. These
types of clearances enable companies to engage in work for government contracts
where classified information is used. These clearances will enable our Company
to expand discussions with current potential U.S. military customers, as well as
create a formal strategy for the Company to pursue the increasingly large
government mobile application opportunities anticipated in the months and years
to come.
During the third quarter of 2012, the Company began its preparation to meet
HIPAA and HITECH compliance requirements in its facilities, staffing and
technology. The Company's novel platform has been readied to provide mobile
application customers with a mechanism to enable HIPAA and HITECH compliance at
the app and app functionality level that will enable the Company to expand its
sales opportunities with existing healthcare customers, strengthen its product
offering to current potential customers, and further broaden the market
potential for the Company's software solutions.
The HIPAA Privacy Rule provides federal protections for personal health
information held by covered entities and gives patients an array of rights
with respect to that information. At the same time, the Privacy Rule is
balanced so that it permits the disclosure of personal health information
needed for patient care and other important purposes.
The Security Rule specifies a series of administrative, physical, and
technical safeguards for covered entities to assure the confidentiality,
integrity, and availability of electronic protected health information.
The Health Information Technology for Economic and Clinical Health (HITECH)
Act, enacted as part of the American Recovery and Reinvestment Act of 2009,
was signed into law on February 17, 2009 to promote the adoption and
meaningful use of health information technology. Subtitle D of the HITECH Act
addresses the privacy and security concerns associated with the electronic
transmission of health information, in part, through several provisions that
strengthen the civil and criminal enforcement of the HIPAA rules.
The Company has also become involved in the Healthcare Mobile Standards
arena. Along with ASTM E31, the Company has taken a leadership role in
identifying national standards around mobile applications and security and
privacy, use, interaction and the U.S. Food and Drug Administration. The Company
also assisted in identifying healthcare industry leaders to participate in the
task group.
ASTM International, formerly known as the American Society for Testing and
Materials (ASTM), is a globally recognized leader in the development and
delivery of international voluntary consensus standards. Today, some 12,000
ASTM standards are used around the world to improve product quality, enhance
safety, facilitate market access and trade, and build consumer confidence.
16--------------------------------------------------------------------------------
The Company accepted the position of Chair of the Emerging Technology Committee
at the Application Developers Alliance, where the Company shapes the Alliance's
work product, industry research and other relevant issues facing the industry
today.
The Application Developers Alliance is an industry association dedicated to
meeting the unique needs of application developers. Alliance members include
10,000 individual application developers and dozens of companies, investors,
and stakeholders in the apps ecosystem.
During the third quarter, the Company identified and began creating a
penetration strategy and messaging for five large vertical markets where its
technology and subject matter expertise are differentiators.
During the third quarter, the Company contracted with Entre-Strat Consulting,
LLC for the services of Robert Brinson to serve as the Company's Chief Executive
Officer. Mr. Brinson has extensive experience in the conceptualization,
development and commercialization of intellectual property and
technology. Additionally, he excels in assisting startups and turnarounds in
most aspects of their endeavors and in assisting enterprises in entrepreneurial
initiatives and strategies. Mr. Brinson is well connected in many industries
including but not limited to healthcare, defense & homeland security, financial
services, and the Internet. He has coauthored numerous standards, industry
papers and whitepapers.
For his clients, Mr. Brinson strives to implement the positive and productive
foundations of his Agile Climb consulting and business strategies in ways to
create rapid, efficient, productive and strong movement within their respective
industries.
Mr. Brinson is working with industry leaders on policy strategies to be
presented by the Company and other industry leaders on Capitol Hill at a date to
be determined when the policy strategies have reached an appropriate point in
their development.
17
--------------------------------------------------------------------------------Sources of Revenue
We derive revenues from the following sources:
Subscription fees - monthly fees charged to customers for
access to our SaaS/PaaS applications. SaaS/PaaS
applications' subscription fees primarily consist of sales
of subscriptions through private-label marketing partners
to end users. We typically have a revenue-share arrangement
with these private-label marketing partners in order to
encourage them to market our products and services to their
customers. We make subscription sales either on a
subscription or on a "for fee" basis. Subscriptions are
generally payable on a monthly basis and are typically paid
via credit card of the individual end user. In the past, we
recognized all subscription revenue on a gross basis and in
accordance with our policy to periodically review our
accounting policies we recognized that certain contracts
require the reporting of subscription revenue on a gross
basis and others on a net basis according to U.S. GAAP. On
that basis, we continue to report subscription revenue from
certain contracts on a gross basis and others on a net
basis. The net effect of this reclassification of expenses
only impacts gross revenue and certain gross expenses; it
does not change net income or loss. Subscription fees are
recognized as earned through our revenue sharing
arrangements.
Professional service fees - fees related to consulting
services, some of which complement our other products and
applications. For example, a customer may request that we
re-design its website to better accommodate our products or
to improve its own website traffic or adapt our mobile
platform to their specific requirements. We typically bill
professional service fees on a time and material
basis. These fees are recognized upon the delivery of
services and acceptance by the customer.
License fees - fees charged for perpetual or term license
agreements for the use of the Mobile platform, or any of
our applications that may be offered as part of our
platforms. Revenue is generally recognized on a monthly
basis during the term of contract.
Hosting fees - fees charged to customers with network
accessibility for any of the Smart Online platform products
or applications. Revenue is generally recognized on a
monthly basis as services are provided.
Other revenue - revenues generated from non-core activities
such as maintenance fees; original equipment manufacturer
contracts; and miscellaneous other revenues
Cost of Revenues
Cost of revenues primarily is composed of salaries associated with maintaining
and supporting customers, the cost of domain name and e-mail registrations, and
the cost of external facilities where our applications and our customers'
customized applications are hosted.
Operating Expenses
During 2011 and 2010, our primary business initiatives included increasing
subscription fee revenue and professional services revenue, making
organizational improvements, concentrating our development efforts on
enhancements and customization of our platforms and applications, and shifting
our strategic focus to the sales and marketing of our products. During the first
nine months of 2012, we provided services for our subscription fee customers and
focused our efforts on providing mobile solution products to businesses and
not-for-profit organizations.
18
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General and Administrative - General and administrative expenses are composed
primarily of costs associated with our executive, finance and accounting, legal,
human resources, and information technology personnel and consist of salaries
and related compensation costs; professional services (such as outside legal
counsel fees, audit, and other compliance costs); depreciation and amortization;
facilities and insurance costs; and travel and other costs.
Sales and Marketing - Sales and marketing expenses are composed primarily of
costs associated with our sales and marketing activities and consist of salaries
and related compensation costs of our sales and marketing personnel, travel and
other costs, and marketing and advertising expenses. Historically, we spent
limited funds on marketing, advertising, and public relations, particularly due
to our business model of partnering with established companies with extensive
small-business customer bases. As we continue to execute our sales and marketing
strategy to take our products to market, in the first nine months of 2012
we increased our expenditures for advertising campaigns and additional sales and
marketing personnel.
Research and Development - Research and development expenses include costs
associated with the development of new products, and general technology
research. These costs are composed primarily of salaries and related
compensation costs of our research and development personnel as well as outside
consultant costs.
Professional accounting standards require capitalization of certain software
development costs subsequent to the establishment of technological feasibility,
with costs incurred prior to this time expensed as research and development.
Technological feasibility is established when all planning, designing, coding,
and testing activities that are necessary to establish that the product can be
produced to meet its design specifications have been completed. At the end of
the third quarter of 2011, our technical team achieved technological feasibility
for our Mobile platform product and continues to develop features and
applications. As a result, we capitalized a portion of the costs incurred during
the fourth quarter of 2011 into capitalized software in our balance sheet at
December 31, 2011 and we continued to capitalize appropriate costs in the first
nine months of 2012. In the past, we had not developed detailed design plans for
our SaaS/PaaS applications, and the costs incurred between the completion of a
working model of these applications and the point at which the products were
ready for general release had been insignificant and as a result of low revenue
generated by the sale of the prior applications that did not support the net
realizable value of any capitalized costs, we continued the expensing of
underlying costs as research and development.
Stock-Based Expenses - Our operating expenses include stock-based expenses
related to options, restricted stock awards, and warrants issued to employees
and non-employees. These charges have been significant and are reflected in our
historical financial results. Accounting standards will continue to result in
material expenses as long as a significant number of options are outstanding.
19
--------------------------------------------------------------------------------Results of Operations for the Three Months Ended September 30, 2012 and
September 30, 2011
The following table sets forth certain statements of operations data for the
periods indicated:
Three Months Ended Three Months Ended 2012 vs 2011
September 30, 2012 September 30, 2011 Change
% of % of
Dollars Revenue Dollars Revenue Dollars Percent
REVENUES:
Subscription fees $ 84,291 60.2 % $ 88,101 76.6 % $ (3,810 ) -4.3 %
Professional service
fees 2,656 1.9 % - - % 2,656 100 %
License fees 26,425 18.9 % - - % 26,425 100 %
Hosting fees 324 0.2 % - - % 324 100 %
Other revenue 26,341 18.8 % 26,988 23.4 % (647 ) -2.4 %
Total revenues 140,037 100.0 % 115,089 100.0 % 24,948 21.7%
COST OF REVENUES 105,657 75.5 % 205,215 178.3 % (99,558 ) -48.5 %
GROSS PROFIT (LOSS) 34,380 24.5 % (90,126 ) -78.3 % 124,506 138.1 %
OPERATING EXPENSES:
General and
administrative 427,398 305.2 % 232,874 202.3 % 194,524 83.5 %
Sales and marketing 210,031 150.0 % 125,866 109.4 % 84,165 66.9 %
Research and
development 40,363 28.8 % 92,280 80.2 % (51,917 ) -56.3 %
Total operating
expenses 677,792 484.0 % 451,020 391.9 % 226,772 50.3 %
LOSS FROM OPERATIONS (643,412 ) -459.5 % (541,146 ) -470.2 % 102,266 18.9 %
OTHER INCOME
(EXPENSE):
Interest expense, net (428,726 ) -306.1 % (336,988 ) -292.8 % 91,738 27.2 %
Gain on legal
settlements, net 3,713 2.6 % - - % 3,713 100.0 %
Change in market value
of settlement related
financial instrument - - % (295,000 ) -256.3 295,000 100.0 %
Total other expense (425,013 ) -303.5 % (631,988 ) -549.1 % (206,975 ) -32.8 %
NET LOSS $ (1,068,425 ) -763.0 % $ (1,173,134 ) -1,019.3 % $ (104,709 ) -8.9 %
20--------------------------------------------------------------------------------Revenues
Revenues increased 22% to $140,037 for the three months ended September 30, 2012
from $115,089 for the same period in 2011. Our overall increase in revenues was
driven by the sales of our new Mobile platform product. During the period, we
focused our time and effort on marketing and promoting our newly released Mobile
product. Select items are discussed in detail below.
Subscription Fees
Revenues from subscription fees decreased 4% to $84,291 for the three months
ended September 30, 2012 from $88,101 for the same period in 2011. This decline
is primarily attributable to the ongoing migration of one direct-selling
organization customer to its own technology solution coupled with a decrease in
demand for new subscription relationships during the third quarter of 2012. On
October 11, 2012, we terminated our contractual relationship with URAssociation
therefore, we believe our subscription revenue in the fourth quarter of 2012
will be substantially reduced.
Professional Service Fees
Revenues from professional service fees increased 100% to $ 2,656 for the three
months ended September 30, 2012 from $-0- for the same period in 2011. The
increase is due to the sale of professional development services in conjunction
with the sale of the new Mobile platform product during the three month period
ended September 30, 2012.
License Fees
Revenues from license fees increased 100% to $ 26,425 for the three months ended
September 30, 2012 from $-0- for the same period in 2011. The increased license
fee revenue results from the sale of our new Mobile platform product during the
third quarter of 2012.
Hosting Fees
Revenues from hosting fees increased 100% to $324 for the three months ended
September 30, 2012 from $-0- for the same period in 2011. This increase is
directly related to the sales of our new Mobile platform.
Other Revenue
Revenues from non-core activities decreased 2% to $26,341 for the three months
ended September 30, 2012 from $26,988 for the same period in 2011. The decrease
in other revenue is directly related to the decrease in subscription sales as
other revenue is largely comprised of fees charged for merchant services related
to subscription fees.
21--------------------------------------------------------------------------------Cost of Revenues
Cost of revenues decreased 48% to $105,657 for the three months ended September
30, 2012 from $205,215 for the same period in 2011. This decrease is the result
of a reduction in costs required to provide services to our subscription and
Mobile platform customers.
Operating Expenses
General and Administrative
General and administrative expenses increased 84% to $427,398 for the three
months ended September 30, 2012 from $232,874 for the same period in 2011. This
change is primarily attributable to increases in professional service fees of
$96,430, consulting fees $33,649, fees paid to the Board of Directors of $7,250,
bank fees of $20,304, hosting fees of $4,102,and travel costs of $4,728 during
the three month period ended September 30, 2012 compared to the same period in
2011.
Sales and Marketing
Sales and marketing expenses increased 67% to $210,031 for the three months
ended September 30, 2012 from $125,866 for the same period in 2011. This
increase is primarily attributable to increases in salaries and related expenses
of $64,950 and marketing and events costs of $18,729 during the three month
period ended September 30, 2012 compared to the same three month period in 2011.
Research and Development
Research and development expenses decreased 56% to $40,363 for the three months
ended September 30, 2012 from $92,280 for the same period in 2011. This decrease
is primarily attributable to the requirement to capitalize research and
development expenses directly related to the development of our mobile
application for the Mobile platform during the three month period ended
September 30, 2012.
Other Income (Expense)
Net other expense decreased 33% to $425,013 for the three months ended September
30, 2012 from $631,988 for the same period in 2011. This decrease is primarily
attributable to the payment of additional interest expense.
22
--------------------------------------------------------------------------------Results of Operations for the Nine Months Ended September 30, 2012 and September
30, 2011
The following table sets forth certain statements of operations data for the
periods indicated:
Nine Months Ended Nine Months Ended 2012 vs 2011
September 30, 2012 September 30, 2011 Change
% of % of
Dollars Revenue Dollars Revenue Dollars Percent
REVENUES: `
Subscription fees $ 251,097 60.2 % $ 281,748 77.2 % $ (30,651 ) -10.9 %
Professional service
fees 27,356 6.6 % - - % 27,356 100.0 %
License fees 63,783 15.3 % - - % 63,783 100.0 %
Hosting fees 972 0.2 % - - % 972 100.0 %
Other revenue 74,085 17.7 % 83,150 22.8 % (9,065 ) -10.9 %
Total revenues 417,293 100.0 % 364,898 100.0 % 52,395 14.4 %
COST OF REVENUES 302,824 72.6 % 599,420 164.3 % (296,596 ) -49.5 %
GROSS PROFIT (LOSS) 114,469 27.4 % (234,522 ) -64.3 % 348,991 148.8 %
OPERATING EXPENSES:
General and
administrative 968,749 232.2 % 880,605 241.3 % 88,144 10.0 %
Sales and marketing 599,638 143.7 % 414,808 113.7 % 184,830 44.6 %
Research and
development 73,625 17.6 % 356,104 97.6 % (282,479 ) -79.3 %
Loss on disposal of
assets, net - - % 3,471 .9 % (3,471 ) -100.0 %
Total operating
expenses 1,642,012 393.5 % 1,654,988 453.6 % (12,976 ) -.8 %
LOSS FROM OPERATIONS (1,527,543 ) -366.1 % (1,889,510 ) -517.8 % (361,967 ) -19.2 %
OTHER INCOME
(EXPENSE):
Interest expense, net (1,203,037 ) -288.3 % (953,703 ) -261.4 % 249,334 26.1 %
Gain on legal
settlements, net 3,815 .9 % 177,019 48.5 % (173,204 ) -97.8 %
Change in market
value of settlement
related financial
instrument (442,500 ) -106.0 % (295,000 ) -80.8 % (147,500 ) -50.0 %
Total other expense (1,641,722 ) -393.4 % (1,071,684 ) -293.7 % (570,038 ) -53.2 %
NET LOSS $ (3,169,265 ) -759.5 % $ (2,961,194 ) -811.5 % $ (208,071 ) -7.0 %
23--------------------------------------------------------------------------------Revenues
Revenues increased 14% to $417,293 for the nine months ended September 30, 2012
from $364,898 for the same period in 2011. Our overall increase in revenues is
attributed to the sales revenue from our new Mobile platform product. During the
period, we focused our time and effort on marketing and promoting our newly
released Mobile platform product. Select items are discussed in detail below.
Subscription Fees
Revenues from subscription fees decreased 11% to $251,097 for the nine months
ended September 30, 2012 from $281,748 for the same period in 2011. This decline
is primarily attributable to the ongoing migration of one direct-selling
organization customer to its own technology solution coupled with a decrease in
demand for new subscription relationships during the first nine months of
2012. On October 11, 2012, we terminated our contractual relationship with URA;
therefore, we believe our subscription revenue in the fourth quarter of 2012
will be substantially reduced.
Professional Service Fees
Revenues from professional service fees increased 100% to $27,356 for the nine
months ended September 30, 2012 from $-0- for the same period in 2011. The
increase is due to the sale of professional development services in conjunction
with the sale of our Mobile platform product during the nine month period ended
September 30, 2012.
License Fees
Revenues from license fees increased 100% to $63,783 for the nine months ended
September 30, 2012 from $-0- for the same period in 2011. The increased license
fee revenue results from the sale of our Mobile platform product during the
first nine months of 2012.
Hosting Fees
Revenues from hosting fees increased 100% to $972 for the nine months ended
September 30, 2012 from $-0- for the same period in 2011. This increase is
directly related to the sales of our Mobile platform.
Other Revenue
Revenues from non-core activities decreased 11% to $74,085 for the nine months
ended September 30, 2012 from $83,150 for the same period in 2011. These items
are primarily fees generated through merchant processing transactions. As we
focus on the growth of our Mobile platform revenue in the future, revenues from
these activities will diminish and become insignificant.
Cost of Revenues
Cost of revenues decreased 49% to $302,824 for the nine months ended September
30, 2012 from $599,420 for the same period in 2011. This decrease is the result
of decreased personnel services costs associated with servicing our subscription
fee customers and the reduced costs required to operate our Mobile platform.
24
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Operating Expenses
General and Administrative
General and administrative expenses increased 10% to $968,749 for the nine
months ended September 30, 2012 from $880,605 for the same period in 2011. This
increase is primarily attributable to increases in professional fees of $62,389,
bank fees related to IDB bank debt of $36,384, fees paid to the Board of
Directors of $16,250, internet hosting costs of $13,899 and travel of $6,610,
offset by personnel reduction costs of $31,039 and rental reduction costs of
$30,444 during the nine month period ended September 30, 2012 compared to the
same period in 2011.
Sales and Marketing
Sales and marketing expenses increased 45% to $599,638 for the nine months ended
September 30, 2012 from $414,808 for the same period in 2011. This increase is
primarily attributable to increases in personnel and related expenses of
$135,865 and marketing and events costs of $58,090 during the nine month period
ended September 30, 2012 compared to the same period in 2011.
Research and Development
Research and development expenses decreased 79% to $73,625 for the nine months
ended September 30, 2012 from $356,104 for the same period in 2011. This
decrease is primarily attributable to the requirement to capitalize research and
development expenses directly related to the development of mobile application
for the Mobile platform during the nine month period ended September 30, 2012.
Other Income (Expense)
Net other expense increased 53% to an overall expense of $1,641,722 for the nine
months ended September 30, 2012 from $1,071,684 for the same period in 2011.
This increase was attributable to the increase in interest expense and the
change in market value of settlement related financial instrument for the nine
months ended September 30, 2012.
Provision for Income Taxes
We have not recorded a provision for income tax expense because we have been
generating net losses. Furthermore, we have not recorded an income tax benefit
for the first three quarters of 2012 primarily due to continued substantial
uncertainty based on objective evidence regarding our ability to realize our
deferred tax assets, thereby warranting a full valuation allowance in our
financial statements. As of September 30, 2012, we had approximately $68.9
million in net operating loss carryforwards, which may be utilized to offset
future taxable income.
Utilization of our net operating loss carryforwards may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended and similar state provisions.
Such an annual limitation could result in the expiration of the net operating
loss carryforwards before utilization. These net operating loss carryforward
amounts will expire between 2012 and 2029.
25
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
As of September 30, 2012, our principal sources of liquidity were cash and cash
equivalents totaling $251,174 and current accounts receivable of $98,038, net of
allowance for doubtful accounts, as compared to $165,139 of cash and cash
equivalents and $6,630, net of allowance for doubtful accounts, in accounts
receivable as of December 31, 2011. As of September 30, 2012, we had drawn
$5,000,000 on the IDB Credit Facility for our operations. Deferred revenue at
September 30, 2012 was $125,514 as compared to $33,163 at December 31, 2011.
As of November 2, 2012, our principal sources of liquidity were cash and cash
equivalents totaling approximately $102,649 and accounts receivable of
approximately $41,525. In addition, we had drawn approximately $5,000,000 on the
IDB Bank Credit Facility. As of November 2, 2012, we also have a commitment from
our convertible secured subordinated noteholders to purchase up to an additional
$3.35 million in Notes upon approval and call by our Board of Directors.
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