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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the fiscal year ended ____________
For the transition period from January 1, 2009 to June 30, 2009.
Commission File No. 000-52882
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o
Indicate by check mark whether the registrant has (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405) is not contained in this form and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
YES o NO x
Aggregate market value of voting stock held by non-affiliates: N/A.
As of February 26, 2010, the Company had 48,728,000 shares of its $.001 par value common stock issued and outstanding.
Index to Verecloud, Inc. Transition Report Form 10-K
This Amendment No. 1 on Form 10-KT/A (this "Amendment") amends the Transition Report on Form 10-KT of Verecloud, Inc. (“Verecloud”, “we,” “us,” “our,” or the“Company”) for the period of January 1, 2009 to June 30, 2009, filed with the Securities and Exchange Commission ("SEC") on March 1, 2010 (the "Original Transition Report"). This Amendment amends the Original Transition Report in the following respects: (i) amends the financial statements for the transition period to include unaudited financial statements for the comparable prior transition period of ended June 30, 2008; and (ii) modifies the Restatement of Financials, Management's Discussion and Analysis and footnote 9 to the financial statements regarding the accounting treatment of the purchase of the membership interests of the Company's two former principals. We are also re-filing Exhibit 31.1, Section 302 Certification – Principal Executive Officer, Exhibit 31.2, Section 302 Certification – Principal Financial Officer and Exhibit 32.1, Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as required by Rule 12b-15 of the Securities and Exchange Act of 1934.
Except as described above, no attempt has been made in this Amendment to modify or update other disclosures presented in the Original Transition Report. This Amendment does not reflect events occurring after the filing of the Original Transition Report or modify or update those disclosures, including the exhibits to the Original Transition Report affected by subsequent events. Accordingly, this Amendment should be read in conjunction with our filings with the SEC subsequent to the filing of the Original Transition Report, including any amendments to those filings.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Transition Report on Form 10-K for Verecloud contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and other similar words.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and elsewhere in this Transition Report on Form 10-K. In addition, our past results of operations do not necessarily indicate our future results. Moreover, the telecommunications service business is very competitive and rapidly changing. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Transition Report on Form 10-K or in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Transition Report on Form 10-K. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
ITEM 1. BUSINESS
On July 19, 2007, Sage was incorporated in Nevada as a web development services company.
On August 31, 2009, Sage consummated the Share Exchange with the sole member of Cadence II, pursuant to which it acquired all of the membership interests of Cadence II in exchange for the issuance to the sole member of Cadence II, 42,320,000 shares of our common stock representing 92.0% of our issued and outstanding common stock. After the Share Exchange, our business operations consist of those of Cadence II. The Share Exchange was treated as a merger of Sage and Cadence II, which is accounted for as a reverse acquisition with Cadence II being the acquirer for financial reporting purposes. As such, for all disclosures referencing shares authorized, issued, outstanding, reserved for, per share amounts and other disclosures related to equity, amounts have been retroactively restated to reflect share quantities as if the exchange of Cadence II membership interest had occurred at the beginning of the periods presented as altered by the terms of the Share Exchange. Upon the closing of the Share Exchange, the Articles of Incorporation were amended to change the name of the Company to Network Cadence, Inc. and Cadence II became a wholly owned subsidiary of Network Cadence, Inc. On January 25, 2010, the Company instituted a four-for-one forward split of its common stock and amended its Articles of Incorporation to change the name of the Company from Network Cadence, Inc. to Verecloud, Inc.
Upon completion of the Share Exchange, the operations of Sage ceased. As a result, net assets of Sage at August 31, 2009, which were negative $13,774 and consisted of cash and web development costs ($4,326) offset by amounts owed to the former President ($18,100) were written off.
The Company is headquartered in Englewood, Colorado and, through its wholly owned subsidiary, Cadence II, provides transformation solutions to the telecommunications industry. The Company creates and implements functional architectural designs that solve the problems related to the high costs of integration for communication service providers (“CSPs”). Through its Service Lifecycle Management methodology (“SLM”), the Company enables CSPs to dramatically improve performance in deploying new services while reducing their operation costs. Although it is anticipated that these professional services will drive the short-term revenue growth for the Company, Verecloud is in the process of developing and rolling out a cloud-based computing system known as Nimbus. However, if the Company is unable to secure outside private financing, this may prevent the Company’s business plan from materializing.
Verecloud is focused on providing professional services and business platform solutions to CSPs. These services and solutions are focused on the service delivery platform component of CSPs back office systems and enable CSPs to, among other things, operate more efficiently, introduce new products faster and deliver a better customer experience.
Cadence II was formed in 2006 and, for the past three years, has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Cadence II has provided professional service solutions in areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others). For the periods covered by this report, the Company’s revenue stream consists solely of billable professional services. No software or product revenue has yet occurred.
While professional services remain the Company’s sole source of revenue through at least mid-2010, the Company’s objective is to develop a unique platform known as Nimbus, which we hope will position the Company to exploit the opportunity created by the continued growth in cloud computing. Nimbus is expected to bridge the gap between (i) small and medium businesses, that want expanded and integrated services via the “cloud,” (ii) CSPs who need innovative, high-margin services to drive growth, and (iii) innovative cloud computing solution providers who want access to the large distribution channel that CSPs have developed for voice and data services. The Company believes that Nimbus can potentially open new revenue opportunities, protect investments made in existing services and create a new distribution model for both CSPs and cloud computing solution providers in a low cost, high return manner. The success of the Company’s plan will depend on several major factors. First, its ability to raise the capital needed to develop Nimbus. Second, the successful development of Nimbus into a commercially viable and competitive cloud-based solution. Third, the Company’s ability to effectively market and sell the Nimbus solution to CSPs. If the Company is unable to successfully execute on some or all of these factors, there could be a material adverse effect on the Company’s business, financial condition and results of operations. Currently, the development of Nimbus is in the early phase with the focus in the first quarter of 2010 on developing technical timelines and partner strategies. The Company expects to roll out the beta phase in the second quarter of 2010 with platform testing and integration occurring in the third quarter of 2010. Commercial viability is targeted for the fourth quarter of 2010. However, the entire foregoing plan is dependent on the Company’s ability to raise the needed capital in the first half of 2010.
Once Nimbus is commercially available, the Company anticipates focusing on three streams of revenue. First, upfront integration fees charged to customers for integrating Nimbus into their existing systems. Second, license and support fees for ongoing maintenance and support of the platform. Finally, revenue sharing with the CSPs related to revenue generated via the Nimbus platform. If the Company’s business plan is successful, the revenue share component will be the major source of revenue moving forward.
On November 2, 2009, our largest customer, SkyTerra Communications (“SkyTerra”), terminated our contract. For the six months ended June 30, 2009, SkyTerra accounted for 98% of our revenue. As a result, we were forced to reduce 50% of our work force and our revenues declined more than 90% beginning in November 2009.
The global telecommunications industry is a multi-trillion dollar per year industry. CSPs are a subset of the telecommunications industry that interact directly with end-users and wholesale customers to provide communication services such as voice, data, and wireless. CSPs include AT&T, Verizon, Sprint, T-Mobile, Qwest, and British Telecom. As deregulation occurred in the telecommunications industry over the past 20 years, the growth of CSPs accelerated at an unprecedented level as they were able to offer a multitude of new and innovative services.
Historically, CSPs have managed to satisfy growing demand for their services by continuing to add hardware to their communications networks. Rather than upgrading their core software systems, CSPs have added more servers, switches and routers. While capacity and capability of the CSP commercial network broadly expanded, the two supporting software components, the Operational Support System and Business Support System (“OSS/BSS”) remained relatively unchanged. OSS are a set of programs that help CSPs monitor, control, analyze and manage a telephone or computer network. BSS are systems which help CSPs run their business operations when dealing with customers with respect to, taking orders, processing bills, and collecting payments. CSPs, while wanting to add new services, realized they had to overcome significant hurdles such as the dated designs of their legacy OSS/BSS and the high cost of deploying new technology in order to capture new revenue opportunities. High deployment costs, coupled with an inability to leverage existing hardware resources, have been identified within the industry as “the Integration Tax.”
The CSP’s difficulty in managing the Integration Tax issue has created an opportunity for new entrants into the communications services industry: IP-based service providers. IP-based, or Internet Protocol based, refers to the use of the Internet infrastructure to power communications services. Companies such as Skype and Google launched creative and new telecommunication services using the Internet as the foundational component of their communications networks. While IP-based CSPs are a threat to the traditional providers, traditional CSPs have a significant advantage that the Internet companies desire: a large installed base of customers with an established billing relationship . Going forward, traditional CSPs choosing to leverage the power of the Internet, coupled with a wholesale marketing model, can enhance their revenue realization with the addition of next generation services to their current product set.
Telecommunications Transformation, or Telco 2.0, is accepted terminology that refers to this overall paradigm shift which reduces the Integration Tax, enabling CSPs to innovate and provide value-added services to their customers. This can only be accomplished through the deployment of a Service Delivery Platform (“SDP”) layer that enables linkage of disparate network components and Internet based applications (from any source) with legacy back-office systems unique to each CSP. SDPs are a set of components which interface with legacy OSS/BSS systems to create a new entry point for adding, managing, and innovating new services. When a CSP desires to develop a new communication service, they can work directly with the SDP rather than inefficiently interfacing directly with the OSS/BSS. This ultimately creates a way to deliver new services more quickly and at lower cost.
Products and Services
As a result of experience in the telecommunications sector and operational support systems, with significant focus on operational support systems, Verecloud has identified the need for a creative solution in the service management layer via the SDP. The service management layer resides between the traditional OSS/BSS and the commercial network of all CSPs and is designed to address all phases of a service lifecycle. Our approach in the service management layer consists of the following:
Verecloud began funding its research and development activities for the Nimbus project in January 2009 with retained earnings from operations. This research and development project was chartered to develop a proof of concept to evaluate product potential, functionality and product deliverability. Through December 31, 2009, the cost of this research and development project totaled approximately $500,000. These costs consisted primarily of salaries and wages associated with our technical staffing in assessing the viability, potential and technical requirements of the Nimbus solution. Going forward, our research and development spending will focus on the development of the Nimbus solution, however, such spending is dependent upon the Company raising capital in 2010.
While professional services remain the near term opportunity to drive revenue and operating margin growth, the Company expects to develop Nimbus, which we hope will position the Company to exploit the opportunity created by the continued growth in cloud computing. Nimbus will bridge the gap between (i) small and medium businesses that want expanded and integrated services via the “cloud,”(ii) CSPs who need innovative, high-margin services to drive growth, and (iii) innovative clouding computing solution providers who want access to the large distribution channel that CSPs have developed for voice and data services. We believe that Nimbus can potentially open new revenue opportunities, protect investments made in existing services and create an exciting new distribution model for both CSPs and cloud computing solution providers in a low cost, high return manner.
Verecloud is focused on providing professional services and business platform solutions to CSPs. These services and solutions are focused on the service delivery platform component of CSPs back office systems and enable CSPs to, among other things, operate more efficiently, introduce new products faster and deliver a better customer experience.
Verecloud began in 2006 and, for the past three years, has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Verecloud has provided professional service solutions in areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others). !
In addition to developing industry leading technology, Verecloud is also a contributor to communication industry standards bodies such as TM Forum’s SID and SDF, OASIS for Telecom, ATIS Services Oriented Network, Open Mobile Alliance and Institute of Electrical and Electronics Engineers, Inc.
Our customer base has been focused in the telecommunications space. Since inception, our business has been dependent on one significant customer, SkyTerra. For the six months ended June 30, 2009, SkyTerra represented 98% of our revenue. On November 2, 2009, we received a contract termination notice from SkyTerra. As a result, beginning in November 2009, our monthly revenue was reduced by more than 90% due to this termination. Since January 1, 2010, we have successfully helped such providers as Qwest Communications, Numerex, Taser and GigaSpace Technologies in projects ranging from new implementations, or projects that are not constrained by prior networks to enhance and expand the capabilities of legacy systems. We are focused on expanding our customer base through continuing to offer professional services as well as the selling the long term vision of our platform.
The competitive landscape includes firms that are attempting to address CSP transformational needs in the telecommunications industry. These can be segmented into three areas:
Large-scale Systems Integrators are engaged based upon their broad knowledge in solving well-defined CSP problems. Their approach provides a “remedy to a status-quo environment” versus implementation of transformational change. These large competitors are focused on multi-year, expensive projects that may not solve the problem that SLM addresses.
Full Suite Solution Providers offer a suite of products, that when fully implemented, provide an integrated approach in solving the CSPs transformation needs. Their approach, however, comes at a great expense to CSPs. It can be very time consuming to implement, very costly, provides a “one-size-fits-all” solution, and is integrated only within the bounds of their suite. Their solution does not integrate with a CSPs unique legacy OSS/BSS environment. Cost of implementing a full suite of products results in a much lower return on investment for the CSP than a more flexible and less expensive SLM solution.
CSP Transformation Agents are emerging as CSPs embrace the value of and need for a service delivery layer platform. These competitors are small and are narrowly focused on specific areas of SLM. For example, they may address order management but have not fully addressed how this solution integrates with other areas of the overall service lifecycle.
Based on these definitions, Verecloud is considered a CSP Transformation Agent. It is our belief that the SLM methodology provides a superior end-to-end solution that is:
Marketing and Advertising
Verecloud is focused on marketing its professional services and business platform solutions to CSPs. These services and solutions are focused on the service delivery platform component of CSPs back office systems and enable CSPs to, among other things, operate more efficiently, introduce new products faster and deliver a better customer experience.
Intellectual Property and Proprietary Rights
Verecloud claims rights in its inventions, code, and other intellectual property that it has created and that is contained in the SLM, Nimbus, and other components of Verecloud's future products and current services. It has not sought formal registration or filed any U.S. patent or copyright applications for such intellectual property. It has filed a federal application with the U.S. Patent & Trademark Office for the trademark VERECLOUD (U.S. Ser. No. 77/929,616).
We currently have 26 employees, 21 of which are full time employees. In addition to our full time employees, we have three finance and sales consultants. We do not expect to hire additional employees until such time as our operations require.
None of our employees is covered by a collective bargaining agreement. Each of our managerial, sales and administrative employees has entered into a standard form of employment agreement which, among other things, contains covenants not to compete for 24 months following termination of employment and to maintain the confidentiality of certain proprietary information. We believe that our employee relations are good.
Our principal address is 6560 South Greenwood Plaza Boulevard, Number 400, Englewood, Colorado 80111. We currently lease approximately 10,000 square feet of office space. Our lease expires in April 2010.
ITEM 1A. RISK FACTORS
There are numerous and varied risks that may prevent us from achieving our goals, including those described below. You should carefully consider the risks described below and other information included in this prospectus, including our financial statements and related notes. Our business, financial condition and results of operations could be harmed by any of the following risks. If any of the events or circumstances described below were to occur, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline, and investors could lose part or all of their investment.
Risks Related to Our Business
We have received a going concern opinion from our auditors.
Our financial statements have been prepared on the basis of accounting principles applicable to a going concern. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital and implement our business plan. Based on our current business plan and projections, we will need approximately $10 million to meet our cash requirements for the next twelve months. This plan is the basis of discussion with potential investors and strategic partners. Of this amount, approximately $4 million will be used for Nimbus development and product management, approximately $5 million for sales, marketing, working capital and administrative expenses, and $1.2 million to meet the obligations of the promissory note. Furthermore, we intend to seek funding of up to $20 million to fund operations through 2011. The additional $10 million in 2011 is expected to be used to fund ongoing working capital needs for sales and marketing ($3 million), ongoing Nimbus product management and upgrade ($6 million) and overhead and other working capital net of gross margins and cash reserves ($1 million). Since January 2010, we have met with several investment firms and strategic partners in the software and telecommunications industries who have expressed interest in our strategy and could be potential investors in the Company. We are exploring funding options that include debt financing, equity investments, co-development arrangements and strategic alliances. As of February 26, 2010, we have not secured any financing or commitments. Assurances cannot be given that adequate financing can be obtained to meet our capital needs. If we are unable to generate profits and are unable to obtain financing to meet our working capital requirements, we may have to curtail our business sharply or cease operations altogether. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis to retain our current financing, to obtain additional financing, and, ultimately, to attain profitability. Should any of these events not occur, we will be adversely affected and we may have to cease operations.
The products and services we sell are based on an emerging technology and therefore the potential market for our products remains uncertain.
The telecommunication transformation products and services we develop and sell are based on an emerging technology platform and our success depends on organizations and customers perceiving technological and operational benefits and cost savings associated with adopting our solutions. Our relatively limited operating history and the limited extent to which our solutions have been currently adopted may make it difficult to evaluate our business because the potential market for our products remains uncertain.
Failure to properly manage projects may result in unanticipated costs or claims.
Our engagements may involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. Any defects or errors or failure to meet customers’ expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our customers. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, in certain instances, we guarantee customers that we will complete a project by a scheduled date or that the network will achieve certain performance standards. If the project or network experiences a performance problem, we may not be able to recover the additional costs we would incur, which could exceed revenues realized from a project.
Our clients’ complex regulatory requirements may increase our costs, which could negatively impact our profits.
Many of our clients, particularly those in the telecommunication services, are subject to complex and constantly changing regulatory requirements. On occasion, these regulatory requirements change unpredictably. These regulations may increase our potential liabilities if our services are found to contribute to a failure by our clients to comply with the requirements applicable to them and may increase compliance costs as regulatory requirements increase or change. These increased costs could negatively impact our profits.
In our course of business, we expose ourselves to possible litigation associated with performing services on our customers’ properties.
We perform services on our customers’ properties and doing so can result in claims of property damage, breach of contract, harassment, theft, and other such claims. These claims may become time consuming and expensive, which would adversely affect our financial condition and the reputation of our business.
We are highly dependent upon technology, and our inability to keep pace with technological advances in our industry could have a material adverse effect on our business, financial condition and results of operations.
Our success depends in part on our ability to develop IT solutions that keep pace with continuing changes in the IT industry, evolving industry standards and changing client preferences. There can be no assurance that we will be successful in adequately addressing these developments on a timely basis or that, if these developments are addressed, we will be successful in the marketplace. We need to continually make significant investments, with ever increasing regularity, in sophisticated and specialized communications and computer technology to meet our clients’ needs. We anticipate that it will be necessary to continue to invest in and develop new and enhanced technology in shorter intervals and on a timely basis to maintain our competitiveness. Significant capital expenditures may be required to keep our technology up-to-date. There can be no assurance that any of our information systems will be adequate to meet our future needs or that we will be able to incorporate new technology to enhance and develop our existing services. Moreover, investments in technology, including future investments in upgrades and enhancements to software, may not necessarily maintain our competitiveness. Our future success will also depend in part on our ability to anticipate and develop information technology solutions that keep pace with evolving industry standards and changing client demands. Our inability to effectively keep pace with continuing changes in the IT industry could have a material adverse effect on our business, financial condition and results of operations.
Our failure to protect or maintain our existing systems could have material adverse effect on our business, financial condition and result of operations.
Moreover, experienced computer programmers and hackers may be able to penetrate our network security, or that of our customers, and misappropriate confidential information, create system disruptions or cause shutdowns. If this were to occur, we could incur significant expenses in addressing problems created by security breaches of our network.
Our business depends on our clients not going offshore for services.
The potential exists for us to lose existing customers for information technology outsourcing services or other information technology solutions, or incur significant expenses in connection with our customers’ system failures. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design and manufacture, including “bugs” and other problems that can unexpectedly interfere with the operation of our systems. The costs to eliminate or alleviate security problems, viruses, worms and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service.
Our business depends on the growth and maintenance of wireless communications infrastructure.
Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and around the world. This includes deployment and maintenance of reliable next-generation digital networks with the necessary speed, data capacity and security for providing reliable wireless communications services. Wireless communications infrastructure may be unable to support the demands placed on it if the number of customers continues to increase, or if existing or future customers increase their bandwidth requirements. In addition, viruses, worms and similar break-ins and disruptions from illicit code or unauthorized tampering may harm the performance of wireless communications. If a well-publicized breach of security were to occur, general mobile phone usage could decline, which could reduce the demand for and use of our applications. Wireless communications experience a variety of outages and other delays as a result of infrastructure and equipment failures, and could face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as well as our ability to distribute our applications successfully.
The industry in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make profitability even more difficult to sustain.
Other than the technical skills required in our business, the barriers to entry in our business are relatively low. Business start-up costs do not pose a significant barrier to entry. The success of our business is dependent on our employees, customer relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market share and brand recognition.
We operate in a competitive industry with several established and more horizontally integrated companies. It may be difficult to sustain our market share in the event of a decline in market conditions.
Our industry is competitive and rapidly changing. Future competitors may include large international and domestic engineering companies. These competitors may have a material advantage in their financial, technical and marketing resources. We may be unable to successfully compete against future competitors, which would adversely affect our business and operations.
Risks Relating To Our Company
With the recent loss of our largest customer, our revenue has been significantly reduced and we no longer operate at a profit.
On November 2, 2009, we received a contract termination notice from our largest customer, SkyTerra. As a result, we lost more than 90% of our revenue. In light of this notice, we reduced our workforce by approximately 50%. With the loss of our most significant customer, we have limited revenue and, going forward, will not operate at a profit without additional business. We cannot assure you that we will ever be profitable and you should not invest unless you are prepared to lose your entire investment.
We have a material weakness in our system of internal controls, which may prevent us from accurately reporting our financial results or prevent fraud. Currently, the Company does not have a plan nor the resources to remediate this material weakness. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock, if we are ever able to list it on an exchange.
We currently have a material weakness in our system of internal controls. In addition, we currently do not have a plan nor the resources to remediate this material weakness. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide financial reports or prevent fraud, our business reputation and operating results could be harmed. Internal control weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock, if we are ever able to list it on the OTC Bulletin Board or an exchange.
We may not be able to manage our expansion of operations effectively and if we are unable to do so, we will not achieve profitability.
We believe our Nimbus solution will allow us to significantly expand our business and capture new market opportunities. As we grow, we must continue to improve our operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. In order to fund our on-going operations and our future growth, we will need to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships with our customers, suppliers and other third parties. As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel, systems and resources. We will also need to further strengthen our internal control and compliance functions to ensure that we will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. As a result, our results from operations may decline.
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.
Our limited operating history and the unpredictability of our industry make it difficult for investors to evaluate our business and future operating results. An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving markets. The risks and difficulties we face include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories.
Our operating results may fluctuate significantly, which makes our future results difficult to predict and may result in our operating results falling below expectations or our guidance, which could cause the price of our common stock to decline.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock would likely decline substantially.
In addition, factors that may affect our operating results include, among others:
If our clients terminate significant contracted projects or choose not to retain us for additional projects, or if we are restricted from providing services to our clients’ competitors, our revenues and profitability may be negatively affected.
Our clients typically retain us on a non-exclusive basis. Many of our client contracts, including those that are on a fixed price, fixed timeframe basis, can be terminated by the client with or without cause upon 90 days’ notice or less and generally without termination-related penalties. Additionally, our contracts with clients are typically limited to discrete projects without any commitment to a specific volume of business or future work and may involve multiple stages. In addition, the increased breadth of our service offerings may result in larger and more complex projects for our clients that require us to devote resources to more thoroughly understand their operations. Despite these efforts, our clients may choose not to retain us for additional stages or may cancel or delay planned or existing engagements due to any number of factors, including:
These potential terminations, cancellations or delays in planned or existing engagements could make it difficult for us to use our personnel efficiently. In addition, some of our client contracts may restrict us from engaging in business with certain competitors of our clients during the term of the agreements and for a limited period following termination of these agreements. Any of the foregoing factors could negatively impact our revenues and profitability. Other than under existing contractual obligations, none of our customers is obligated to purchase additional services from us. As a result, the volume of work that we perform for a specific customer is likely to vary from period to period, and a significant customer in one period may not use our services in a subsequent period.
We may engage in acquisitions, strategic investments, partnerships, alliances or other ventures that are not successful, or fail to integrate acquired businesses into our operations, which may adversely affect our competitive position and growth prospects.
We may acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our business. We may be unable to identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us or at all, which may adversely affect our competitive position and our growth prospects.
If we acquire another business, we may face difficulties, including:
These difficulties could disrupt our ongoing business and increase our expenses. As of the date of this Transition Report on Form 10-K, we have no agreements to enter into any material acquisition, investment, partnership, alliance or other joint venture transaction.
We are subject to the reporting requirements of the federal securities laws, which impose additional burdens on us.
We are a public reporting company and accordingly subject to the information and reporting requirements of the Securities Act of 1933 (the “Securities Act”), the Securities and Exchange Act of 1934 (the “Exchange Act”) and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). As a public company, these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by Sarbanes-Oxley. Some members of our management team have limited or no experience operating a company whose securities are publicly reported, traded or listed on an exchange, and with SEC rules and requirements, including SEC reporting practices and requirements that are applicable to a publicly reporting or publicly-traded company. We may need to recruit, hire, train and retain additional financial reporting, internal controls and other personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of Sarbanes-Oxley, when applicable, we may not be able to obtain the independent accountant certifications required by Sarbanes-Oxley.
Assertions by a third party that we infringe its intellectual property could result in costly and time-consuming litigation, expensive licenses or the inability to operate as planned.
The software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us may grow. Our technologies may not be able to withstand third-party claims or rights restricting their use. Companies, organizations or individuals, including our competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to provide our services or develop new services and features, which could make it more difficult for us to operate our business.
If we are determined to have infringed upon a third party’s intellectual property rights, we may be required to pay substantial damages, stop using technology found to be in violation of a third party’s rights or seek to obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, or at all, and may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. We may also be required to develop alternative non-infringing technology that could require significant effort and expense or may not be feasible. In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business and results of operations could be harmed.
There is a reduced probability of a change of control or acquisition of us due to the possible issuance of preferred stock. This reduced probability could deprive our investors of the opportunity to otherwise sell our common stock in an acquisition of us by others.
Our Articles of Incorporation, as amended, authorize our board of directors to issue up to 5,000,000 shares of preferred stock, of which no shares have been issued. Our preferred stock is issuable in one or more series and our board of directors has the power to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or designation of such series, without further vote or action by stockhold