Management’s Discussion & Analysis
This management discussion and analysis (“MD&A”) of operating results and financial position of BSM
Technologies Inc. (“BSM” or the “Company”) should be read in conjunction with our unaudited interim
financial statements for the three months ended December 31, 2012 and related notes therein, and our
audited consolidated financial statements for the year ended September 30, 2012 and related notes
therein, which are prepared in accordance with International Financial Reporting Standards (“IFRS”).
Additional information relating to the Company is available on SEDAR at
www.sedar.com
.
The following MD&A contains forward-looking information and statements. Refer to the end of the
MD&A for the disclaimer on forward-looking information and statements.
The MD&A is dated March 1, 2013, and takes into consideration information available up to that date.
All figures are in thousands of Canadian dollars, except for share, per share, per unit, unit, or
subscriber data.
This MD&A contains references to certain financial measures, including some that do not have any
standardized meaning prescribed by Canadian Generally Accepted Accounting Principles (“GAAP”) and
IFRS and may not be comparable to similar measures presented by other entities. These non-GAAP and
non-IFRS financial measures should be viewed as a supplement to, and not a substitute for the
Company’s results of operations reported under IFRS. These financial measures are identified and
defined in note 8.
TABLE OF CONTENTS
1. FINANCIAL RESULTS & HIGHLIGHTS ($ THOUSANDS) --- 1
1.1. HIGHLIGHTS --- 1
1.2. FINANCIAL RESULTS --- 2
2. CORE BUSINESS AND STRATEGY --- 3
2.1. CORE BUSINESS --- 3
2.2. STRATEGY --- 4
3. RESULTS FROM OPERATIONS --- 5
3.1. SELECTED FINANCIAL INFORMATION --- 5
3.2. REVENUE --- 6
3.3. GROSS PROFIT AND MARGINS --- 9
3.4. EXPENSES --- 10
3.5. OTHER EXPENSES (INCOME) --- 12
3.6. NET INCOME --- 12
3.7. EBITDA,ADJUSTED EBITDA --- 13
3.8. ASSETS: SEGMENTED REPORTING --- 13
3.9. SUMMARY OF QUARTERLY DATA --- 13
4. LIQUIDITY AND CAPITAL RESOURCES --- 14
4.1. LIQUIDITY --- 14
4.2. OPTIONS --- 15
4.3. CAPITAL EXPENDITURES --- 16
4.4. LINE OF CREDIT --- 16
5. RELATED PARTY TRANSACTIONS --- 16
6. COMMITMENTS --- 16
6.1. OPERATING LEASES --- 16
6.2. FINANCE LEASES --- 17
7. OUTSTANDING SHARE DATA --- 17
8. NON-GAAP & NON-IFRS MEASURES --- 17
8.1. IDENTIFICATION OF NON-GAAP AND NON-IFRS MEASURES --- 17
8.2. RECONCILIATION OF NON-GAAP AND NON-IFRS MEASURES --- 18
9. OFF-BALANCE SHEET ARRANGEMENTS --- 18
10. CRITICAL ACCOUNTING POLICIES --- 19
10.1. CRITICAL ACCOUNTING ESTIMATES --- 19
11. FINANCIAL INSTRUMENTS AND CAPITAL DISCLOSURE--- 19
11.1. FAIR VALUES --- 19
11.2. CAPITAL DISCLOSURES --- 19
12. SUBSEQUENT EVENTS --- 19
12.1. STOCK OPTIONS --- 20
12.2. FINANCING --- 20
13. RISK AND UNCERTAINTIES THAT COULD AFFECT FUTURE RESULTS --- 20
13.1. RISK FACTORS --- 20
14. FURTHER INFORMATION --- 22
15. CERTIFICATION --- 22
1. FINANCIAL RESULTS & HIGHLIGHTS ($ thousands)
1.1.
Highlights
Highlights for the first quarter are as follows:
• Record revenue: Total revenue of $4,858 represents an increase of 45% over the prior year period.
• Net income: $823 for the quarter represents an 814% improvement over the prior year period.
• Earnings per Share (diluted) (“EPS”): $0.029 per share for the quarter represents an 867% increase over the prior year period.
• EBITDA: $902 for the quarter represents a 522% increase over the prior year period.
• Hardware and other revenue of $2,558 represents an increase of 165% over the prior year period.
• Record number of Sentinel units sold during the quarter: Hardware and other revenue from the Company’s core Sentinel product line of $2,499 for the quarter represents a 187% increase over the prior year period. This is a result of the sale of 3,547 units of the Sentinel solution, representing a 151% increase in the number of Sentinel units sold over the prior year period.
• During the quarter, BSM was awarded the following significant contracts which were the main contributors to the significant increase in hardware and other revenue over the prior year period:
• A major Canadian utility company ordered 1,289 units of the Sentinel solution. This was an exceptional contract because (i) the majority of units ordered were higher-priced dual mode units, and (ii) all of the units were delivered during the quarter, which resulted in all of the hardware revenue being recorded during the period.
• A major security service provider ordered 404 units of the Sentinel solution, all of which were delivered during the quarter.
• A major U.S.-based railroad company ordered an additional 357 unit of the Sentinel solution. Pursuant to the order, the customer has equipped approximately 1,000 of their 10,000 vehicle fleet with the Sentinel solution. • A major Canadian coffee supplier ordered 354 units of the Sentinel solution, all of which were delivered during
the quarter.
• Subsequent to the quarter, the following significant events occurred:
o Financing: On February 28, 2013, the Company completed a fully marketed prospectus offering (the “Offering”) of 6,160,665 common shares for gross proceeds of $8,624,931 at a price of $1.40 per common share. Net proceeds from the Offering were approximately $7,757,435 after related costs including agents’ commissions of $517,496 and other issuance costs of approximately $350,000. In addition, the agents
$100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 $ T ho us an ds
EBITDA
received compensation options to acquire up to an aggregate of 431,246 common shares exercisable at a price of $1.40 per common share until February 28, 2014.
The net proceeds from the Offering are expected to be used by the Company for business expansion, research and development, sales and marketing, product expansion and general working capital purposes. The impact of this transaction if the Offering was in effect at the beginning of the quarter on the fully diluted EPS calculation for the three months ended December 31, 2012, is as follows:
Fully diluted EPS, after financing: $0.024
o The company was awarded a contract with The Toronto District School Board for the deployment of 585 units of the Sentinel solution.
1.2.
Financial Results
Our overall performance for the three months ended December 31, 2012 and 2011 is presented below and should be read in conjunction with the unaudited consolidated interim financial statements for the quarter ended December 31, 2012 and related notes:
Statement of Operations Highlights Three months ended December 31
($ thousands, except per share data) 2012 2011 Better (Worse)
$ %
Revenue $ 4,858 $ 3,341 $ 1,517 45%
Gross profit 2,863 2,124 739 35%
GM % 59% 64% (5)% (8)%
Net income for the period 823 90 733 814%
Net income % of Revenue 17% 3% 14% 467%
Earnings per share – basic $0.029 $0.003 $0.026 867%
Earnings per share – diluted $0.029 $0.003 $0.026 867%
EBITDA (i) 902 145 757 522%
EBITDA(i) % of Revenue 19% 4% 15% 375%
EBITDA(i) per share – basic $0.032 $0.005 $0.027 540%
EBITDA(i) per share – diluted $0.031 $0.005 $0.026 520%
(i) EBITDA is a non-GAPP and non-IFRS financial measure. See explanation of these terms under heading "GAAP and Non-IFRS Measures"
Balance Sheet Highlights As at December 31, 2012 As at September 30, 2012 ($ thousands, except shares and per share data)
Cash and cash equivalents $ 2,468 $ 3,025
Working capital 3,619 2,807
Total assets 11,156 9,554
Total liabilities 4,738 3,958
Shareholders' equity 6,418 5,596
Shares outstanding, end of period 28,578,712 28,578,712
Book value per share $ 0.225 $ 0.196
2. CORE BUSINESS AND STRATEGY
2.1.
Core business
We develop and provide proprietary software focussed solutions to our customers in Canada, the USA and around the world, helping them better manage their assets – both stationary and moving. Our customers operate in a broad range of markets, including rail, construction, transportation, services, oil and gas and government. Our software and hardware solutions provide a key link between our customers’ operations and the systems they use to run their business - facilitating cost reduction, improved customer service, greater efficiency, and enhanced security. Our solutions promote safety and facilitate compliance with safety, workplace and environmental regulations. Our solutions are communication agnostic – capable of being deployed over cellular, Wi-Fi or satellite networks. Our services are delivered over a secure network utilizing Internet and are provided on a “software as a service” (SaaS) basis.
Our solutions provide information that helps our customers monitor and manage their assets in the following areas:
• Telematics: The equipment captures and transmits vehicle parameters, logistical data and vehicle location in real time facilitating a compelling ROI.
• Fuel and maintenance: Our proprietary algorithms enable our systems to track and evaluate vehicle fuel consumption. This information assists our customers in monitoring fuel costs and preventing fraudulent fuel purchases. We have developed robust maintenance software that allows our customers to manage their asset preventative maintenance electronically, thereby eliminating manual paperwork and tracking. • Compliance: The software and hardware
components of our solutions connect directly through the engine control unit of a vehicle and captures real-time data to ensure compliance with government regulations and company-specific standards. This includes hours-of-service, speeding, harsh or extreme acceleration or braking, as well as location and time spent at designated areas. We produce various reports to comply with government reporting requirements.
• Routing and scheduling: By combining real time vehicle location information with mapping and fuel usage data, companies optimize fleet operations, thereby managing planned vs. actual routes in real time. • Work flow management: We are in the process of developing solutions that will help companies manage
their workflow and/or mobile work force by facilitating business processes such as event confirmation, signature verification and form processing while they are in the field.
• Machine to machine: Machine to machine, or M2M, communication refers to information passing through two devices for the purpose of monitoring or delivering alerts. For example, geographically
Secure & Stable Core Network Fuel & Maintenance Compliance Machine to Machine Routing and Scheduling Telematics System Integration Work Flow Management
diverse gas or liquid storage tanks, generators and other stationary assets are monitored throughout the world through the deployment of proprietary remote hardware and integrated software solutions.
• System integration: The provision of current and historical data in a variety of standard formats, including activity reports and maps are integrated with a company’s inventory, ERP, payroll or business development systems to maximize value and minimize costs.
Our competitive advantages include:
• Custom solutions for our customers: Total control of our technology (both the software and hardware components of our solutions) allows us to effectively create solutions unique to the specific needs of our customer.
• Advanced level of network security: Our systems can be deployed in high-risk and mission critical applications.
2.2.
Strategy
The following represents our principal growth strategy objectives over the next three years, as well as the related key risks:
Strategic Objectives Initiatives
• Develop and implement defined
vertical market plans
• Invest in new product and application development, with a particular focus on application convergence
• Assess vertical markets and develop strategy to address our key vertical markets’ needs (rail, construction, and utility verticals) • Evolve our channel strategy and
implement an aggressive sales program • Develop and implement a clear direct channel strategy • Streamline and install business
processes that deliver efficiencies • Continue process optimization and automation, with a focus to providing internal tools
Risks to Our Strategy
Risks Mitigation
Technology:
Lose our leading edge • Continue to improve, develop and incorporate new technologies • Maintain R&D team with leading technology skills
Economy: • Improve technologies to make solutions more cost effective Impact timing of customer
decision to invest • Maintain strong cash management procedures to provide adequate financial flexibility
Competition: • Maintain strong relations and service with existing customers
Can come from current or new
players in the market. • Increase opportunities through a dynamic sales pipeline • Develop robust ROI model for new customers to provide compelling vertically focused solutions
3. RESULTS FROM OPERATIONS
3.1.
Selected financial information
The following table sets forth certain information regarding sales, income from operations, and other information for the periods presented, and should be read in conjunction with the unaudited financial statements for the quarter ended December 31, 2012 and related notes.
Statement of Operations Three months ended December 31
($ thousands, except per share data) 2012 2011 Change
Recurring service revenue $ 2,300 $ 2,375 $ (75) (3)%
Hardware & other revenue 2,558 966 1,592 165%
Revenue 4,858 3,341 1,517 45%
Cost of revenue 1,995 1,217 (778) (64)%
Gross profit 2,863 2,124 739 35%
Expenses
2,
0662,053
(13)
(1)%
Income before interest
797
71
726
1023%
Net interest income(26)
(19)
7
37%
Comprehensive income for the period823
90
733
814%
Earnings per share – basic $0.029 $0.003 $0.026 867%
Earnings per share –diluted $0.029 $0.003 $0.026 867%
EBITDA(i) for the period 902 145 757 522%
EBITDA(i) per share – basic $0.032 $0.005 $0.027 540%
EBITDA(i) per share – diluted $0.031 $0.005 $0.026 520%
Adjusted EBITDA(i) for the period 902 388 514 132% Adjusted EBITDA(i) per share – basic $0.032 $0.013 $0.019 146% Adjusted EBITDA(i) per share – diluted
$0.031 $0.013 $0.018 138% (i) EBITDA and Adjusted EBITDA are non-GAPP and non-IFRS financial measure. See explanation of these terms under "Non-GAAP and Non-IFRS Measures"
Three months ended December 31
Key Financial Measures 2012 2011 Better (Worse)
Gross margin
Recurring service revenue 77% 73% 4%
Hardware & other revenue 43% 41% 2%
Revenue 59% 64% (5)%
We recorded record revenues for this quarter. Significant factors that influenced the Company’s financial results during the quarter include:
• Our five largest customer orders for the quarter resulted in the following:
o These top orders accounted for the sale of 2,676 units, representing approximately 75% of total units sold in the quarter.
o We recorded a total of $1,835 of hardware revenue from these customers for the quarter, representing 72% of total hardware revenue for the quarter.
• We were awarded a contract from one of Canada’s leading utility companies. An initial order for 1,289 units of the Sentinel FM asset tracking solution was made. The initial contract is for three years with an option to renew for a further two-year period. The total value of the contract is approximately $3 million of which approximately $1.2 million has been recognized in these first quarter results.
• We were awarded a contract from one of Canada’s leading coffee providers. An initial order for 354 units of the Sentinel FM asset tracking solution was made. The initial contract is for three years. The total value of the contract is approximately $0.3 million of which approximately $0.2 million has been recognized in these first quarter results.
• We were awarded a contract from one of Canada’s leading international security solutions company. An initial order for 404 units of the Sentinel FM asset tracking solution was made. The initial contract is for three years. The total value of the contract is approximately $0.7 million of which approximately $0.2 million has been recognized in these first quarter results.
Our strategy is to continue to actively increase sales of our core product lines and to continue to improve gross margins by actively increasing our recurring service revenue subscriber base, which will also further insulate us from financial risk resulting from the fluctuation in our hardware sales. We continue to increase our investment in staffing, both in Canada and the USA, to provide the necessary resources to achieve this growth.
3.2.
Revenue
We derive our revenue from 3 main categories of product lines:
• Sentinel, which is our core product line • Usage-based product lines which
includes the SecTrack and iTrax product lines.
• Other product lines which include Mobicom and the insurance product lines. $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 $ t ho us an ds
Total Revenue by Quarter
We recorded record revenues for this quarter, comprised of the following:
Consolidated revenue for the three months ended December 31, 2012 of $4,858 increased 45% from the prior year period revenue of $3,341 due primarily to an increase in sales of our core product line. Total revenues from our core product line, the Sentinel solution, increased by $1,797 or 83% for the same period in fiscal 2012 due to an increase of 2,133 or 151% in the number of Sentinel units sold from 1,414 units in the prior year quarter to 3,547 units for this quarter. Of these 3,547 Sentinel units, 988 units were dual mode units (both cellular and satellite units) which have a higher sales price per unit. We are no longer actively marketing certain product lines including the insurance product line, which has been phased out and the Mobicom product lines. Part of our growth strategy is to continue to aggressively grow our sales pipeline. (i) Segmented revenue information
We operate as one reportable segment.
Revenues by geography (based upon customer location):
Three months ended December 31
($ thousands) 2012 2011
Canada $ 3,590 74% $2,503 75%
United States 982 20% 422 13%
International 286 6% 416 12%
$ 4,858 100% $ 3,341 100%
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
$ %
Sentinel product line $ 3,960 $ 2,163 $ 1,797 83%
Usage-based product lines 426 530 (104) (20)%
Other product lines 472 648 (176) (27)%
Total Revenue $ 4,858 $ 3,341 $ 1,517 45% $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 $ t ho us an ds
Sentinel Revenue by Quarter
Canada is our primary market, accounting for 74% of the quarterly revenues. The USA and the International market contributed 20% and 6% of quarterly revenues respectively. We have been successful in targeting the United States market, especially the railroad market. Revenue from the United States has increased 133% over the prior year period. We will continue to target the railroad market in the United States.
Revenue by product category:
We derive our revenue from the sale of products, recurring services and resale of third party products and services. These revenue streams are reported in two general categories:
• Recurring revenues, which includes monthly Application Service Provider (ASP) fees, monthly monitoring fees, and resale of cellular and satellite data. We enter into services contracts with our customers. Most of our contracts are for 36 months or longer. Recurring revenues are recognized monthly as services are delivered; and
• Hardware and Other Revenues, which includes revenue recognized on the basis of upfront sales of hardware, and service and maintenance agreements under contract ranging from one to three years or longer. Revenue from maintenance contracts will be recognized only as the services are offered, resulting in the deferral of contracted revenues in the future.
Three months ended December 31
($ thousands) 2012 2011
Recurring revenue $ 2,300 47% $ 2,375 71%
Hardware & other 2,558 53% 966 29%
Total revenue $ 4,858 100% $ 3,341 100%
Hardware and Other accounted for 53% of total revenues, compared to 29% for the prior year comparative quarter, representing a 165% increase over the prior year quarter due to a 137% increase in the number of hardware units sold over the prior year quarter.
Recurring revenue:
Recurring revenue for the quarter declined slightly by $75 due to a combination of:
• Recurring revenue from the Sentinel product line increased by $170 or 13% for the quarter. This is due to an increase in the number of Sentinel subscribers. Included in this increase in subscribers are the
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Sentinel $ 1,461 $ 1,291 $ 170 13%
Usage-based product lines 402 515 (113) (22)%
Other product lines 437 569 (132) (23)%
3,584 units sold during the quarter. Approximately 70% of these units were sold at the end of the quarter, resulting in no recognition of recurring revenue for these new units during the quarter. • The offsetting decrease in the remaining product lines is due to a drop in volume of messages for the
usage-based products (SecTrack and iTrax) and the phasing out of other non-core products.
Hardware & other revenue:
We recorded record hardware and other revenues for this quarter of $2,558. Hardware and other revenue for the quarter increased by $1,592 or 165% over the prior year comparable period due primarily to a $1,627 or 187% increase in the Sentinel solution hardware and other revenue over the prior year period. This increase in Sentinel hardware and other revenue is due to an increase of 2,133 units or 151% in the number of Sentinel units sold during the quarter over the prior year period, from 1,414 units in the prior year quarter to 3,547 units for this quarter. The majority of this increase is Sentinel units sold as a result of three new contracts that were filled during the quarter, as outlined in S. 3.1 “Selected Financial Information”.
3.3.
Gross profit and margins
Gross profit margins vary depending on the mix of sales in the period. Hardware and other sales typically generate lower gross margins than recurring service revenues and larger volume hardware sales generate lower gross margins than smaller volume sales.
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Sentinel $ 2,499 $ 872 $ 1,627 187%
Usage-based product lines 24 15 9 60%
Other product lines 35 79 (44) (56)%
$ 2,558 $ 966 $ 1,592 165% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 N um be r o f U ni ts
The gross profit for the quarter improved over the prior year comparable period by $739 or 35% due to a significant increase in hardware and other sales for the quarter. Gross margin declined five percentage points from 64% to 59% as hardware and other sales, with lower gross margin, accounted for 53% of revenue compared to 29% for the prior year comparable. The recurring revenue gross profit increased by $41 or 2% for the quarter. An improvement in pricing resulted in the four percentage point improvement in recurring revenue margins from 73% to 77%. Hardware and other gross profit for the quarter increased by $698 or 178% over the prior year due to an increase in sales of hardware and other. The gross margin on hardware and other revenue increased two percentage points, from 41% to 43% as a result of the mix of products.
3.4.
Expenses
Three months ended December 31
$ thousands) 2012 2011 Better (Worse)
Sales & marketing (i) $ 496 $ 538 $ 42 8%
R&D (ii) 450 369 (81) (22)%
G&A (iii) 1,120 1,146 26 2%
Total Expenses $ 2,066 $ 2,053 $ (13) (1)%
For the three months ended December 31, 2012, total expenses were comparable to the prior year comparative quarter, increasing by only $13 or 1% over the prior year comparable period due primarily to increased research & development costs as a result of increased staffing.
(i) Sales and marketing expenses
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Sales & Marketing:
Expenses, before amortization $ 411 $ 480 $ 69 14%
Amortization 85 58 (27) (47)%
Total $ 496 $ 538 $ 42 8%
Sales and Marketing expenses include the salaries and commissions of sales staff, commissions of third parties, advertising, promotions and other costs such as travel, meals and telephone. These expenses (before amortization) decreased by $69 or 14% for the quarter over the prior year comparative period due to a combination of reduced staffing and lower travel expense during the quarter as compared to the prior year.
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Gross Profit (GP)
Recurring revenue $ 1,772 $ 1,731 $ 41 2%
Hardware & other revenue 1,091 393 698 178%
$ 2,863 $ 2,124 $ 739 35%
Gross Margin
Recurring revenue 77% 73% 4% 5%
Hardware & other revenue 43% 41% 2% 5%
(ii) Research and development expenses
Research and development expenses (“R&D”) consist of employee salaries and expenses related to development personnel and consultants, as well as expenses associated with software and hardware development. Scientific research and investment tax credits (“ITCs”) are also recorded in this category. We did not record any credits in the periods presented. In addition, certain R&D costs that met the Company policy for capitalization are capitalized in the intangible assets on the balance sheet.
Three months ended December 31
($ thousands) 2012 2011 Change
R&D expenses
Expenses, before amortization $ 440 $ 362 $ (78) (22)%
Amortization 10 7 (3) (43)%
Total $ 450 $ 369 $ (81) (22)%
The gross R&D expenses (before ITCs, capitalized costs, and amortization) increased by $81 or 22% for the quarter over the prior year same period due to increased staffing levels.
We continue to expand our R&D team and invest in R&D activities to maintain our technical leadership and enhance our solutions roadmap. We believe that investing in R&D will lower existing manufacturing costs and allow us to add new product and service features that will increase our revenue and margins in future periods. (iii) General and administrative expenses
General and administrative expenses (“G&A”) consists of employee salaries and expenses related to administration personnel and consultants, operations personnel and consultants, all professional fees (legal, audit, tax, consultants) as well as all of the overhead expenses associated with maintaining the offices, complying with all required reporting, board of directors related costs, etc.
G&A expenses, before amortization, for the three months ended December 31, 2012 decreased by $29 or 3% compared to the prior comparable due to a decrease in legal fees.
Three months ended December 31
($ thousands) 2012 2011 Change
G&A Expenses:
Expenses, before amortization $ 1,110 $ 1,139 $ 29 3%
Amortization 10 7 (3) (43)%
3.5.
Other expenses (income)
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Interest expense $ - $ 1 $ 1 100%
Interest income (26) (20) 6 30%
Interest, net $ (26) $ (19) $ 7 37%
Interest income is from finance leases and interest from investments.
3.6.
Net income
Three months ended December 31
2012 2011 Change
Numerator
Net income for period $ 823 $ 90 $ 733 814%
Denominator
Weighted average number of
Common shares outstanding
- basic 28,523,930 29,270,830 746,900 3%
- diluted 28,730,084 29,270,830 540,746 2%
Earnings per share
- basic $ 0.029 $ 0.003 $ 0.026 867%
- diluted $ 0.029 $ 0.003 $ 0.026 867%
Net income for the three months ended December 31, 2012 is $823 or $0.029 per share on a diluted basis (2011 – $90 or $0.003 per share).
The $733 or 814% increase in net income for the quarter and 867% increase in EPS over the prior year comparative period results are primarily due to the record revenues resulting from the increase in hardware and other revenue from our Sentinel product line.
We expect that with increasing revenues and our relatively fixed operating infrastructure costs, we will continue to improve profitability.
$(100) $100 $200 $300 $400 $500 $600 $700 $800 $900 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 $ T ho us an ds Net Income
3.7.
EBITDA, Adjusted EBITDA
EBITDA and Adjusted EBITDA for the quarter is $902. This represents a $757 or 522% and $514 or 132% improvement in EBITDA and Adjusted EBITDA, respectively, over the prior year comparative period due primarily to the $739 or 35% increase in gross profit resulting from the 165% improvement in hardware and other revenue over the prior year comparable period.
EBITDA and Adjusted EBITDA are non-GAAP and non-IFRS measure and also exclude share-based compensation expense and goodwill impairment charges. As EBITDA and Adjusted EBITDA are non-GAAP measures, they are not universally defined. See “Non-GAAP and non-IFRS measures” for reconciliation of net income to EBITDA and Adjusted EBITDA.
3.8.
Assets: Segmented reporting
The majority of the Company’s assets reside in Canada. Total assets have increased $1,602 to $11,156 at December 31, 2012 from $9,554 at September 30, 2012 due primarily to a $1,689 increase in accounts receivable resulting from the $1,517 increase in revenue in the quarter.
3.9.
Summary of quarterly data
The following table sets forth certain audited information for each of the eight most recent quarters, the last of which ended December 31, 2012. The quarterly information has been derived from our unaudited consolidated financial statements that we feel have been prepared on a basis consistent with the audited consolidated financial statements (except as noted below) and include all adjustments necessary for the fair presentation of the information presented.
($ thousands, except per share data)
2011 (IFRS) (i, ii) 2012 (IFRS) (i) (IFRS) 2013 (i)
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Revenue $3,902 $ 3,915 $ 3,366 $ 3,341 $ 3,745 $ 3,369 $ 3,356 $4,858
Gross profit 2,113 2,318 1,966 2,125 2,387 2,287 2,412 2,863
Net income (loss) 108 239 319 90 338 477 635 823
EBITDA(ii) 166 305 385 145 401 540 674 902
Adjusted EBITDA(ii) $166 $ 305 $ 540 $ 388 $ 401 $ 540 $ 674 $ 902 EPS (basic) $ 0.004 $ 0.008 $ 0.011 $ 0.003 $ 0.012 $ 0.017 $ 0.022 $ 0.029
EPS (diluted) $ 0.004 $ 0.008 $ 0.011 $ 0.003 $ 0.012 $ 0.017 $ 0.022 $ 0.029
(i) EBITDA, and Adjusted EBITDA are non-GAAP and non-IFRS financial measures. See explanation of these terms under
heading "Non-GAAP and non-IFRS Measures"
(ii) Gross profit is restated to be consistent with Q1-2012 IFRS restatement.
Historically, our results have fluctuated on a quarterly basis. Due to the complexity of some of the products and services and the significant volumes, the sales cycle can vary significantly, ranging from several weeks to several months. Customer buying patterns and year-ends will also impact the seasonality of the sales.
4. LIQUIDITY AND CAPITAL RESOURCES
4.1.
Liquidity
The factors impacting the change in cash are reflected below:
Liquidity
Three months ended December 31
($ thousands) 2012 2011 Change
Cash, beginning of period $ 3,025 $ 1,958 $ 1,067 54%
Cash, end of period 2,468 2,202 266 12%
Increase (decrease) in cash (557) 244 (801) (328)%
Change in cash due to:
Operating activities:
Non-cash operating working capital (1,458) 110 (1,568) (1425)%
Cash from operations 928 163 765 469%
Operations (530) 273 (803) (294)%
Financing activities (1) (2) 1 50%
Investing activities (26) (27) 1 4%
Total change in cash $ (557) $ 244 $ (801) (328)%
Operating activities:
Three months ended December 31
($ thousands) 2012 2011 Change
Operating activities:
Income for the period $ 823 $ 90 $ 733
Items not involving cash:
Amortization of property and equipment 25 15 10
Amortization of intangible assets 80 58 22
Change in non-cash operating working capital (1,458) 110 (1,568) Net cash provided by (used in) operating activities $ (530) $ 273 $(803)
Net Decrease (Increase) in Non-cash Working Capital
($ thousands) 2012 2011 Change
Decrease (Increase):
Accounts receivable $ (1,689) $ 81 $ (1,770)
Net investment in sales-type leases
including long term portion (181) (52) (129)
Investment tax credits receivable - 156 (156)
Inventories 70 (164) 234
Prepaid expenses and other assets (438) 67 (505)
$ (2,238) $ 88 $ (2,326)
Accounts payable, accrued liabilities and provisions 734 122 612
Deferred revenue 46 (100) 146
$ 780 $ 22 $ 758
Net decrease (increase) in non-cash working capital $ (1,458) 8. $ 110 9. $ (1,568)
We generated $928 in cash from operations during the quarter, representing an increase of $765 over the prior year period, due primarily to the $823 of Income for the period which represents a $733 increase over the prior year period.
We utilized $1,458 of cash for working capital, representing a $1,568 increase in the use of such cash over the prior year period. The primary use of this working capital was in the higher account receivable balance at the end of the quarter, which utilized $1,689 of the cash, representing a $1,770 increase in the use of cash in accounts receivable over the prior year period.
Financing activities:
There was no significant activity in financing activities this quarter over the prior year.
Investing activities:
We utilized $1 less cash in investing activities this quarter over the prior year.
4.2.
Options
Summary of the Company's stock options is presented below:
December 31, 2012 September 30, 2012
Number of options Weighted average exercise price Number of options Weighted average exercise price Balance, beginning of period 914,936 $ 1.14 957,417 $ 1.14
Forfeited - - (42,481) 0.94
Balance, end of period 914,936 $ 1.14 914,936 $ 1.14
The following table summarizes information about stock options outstanding and exercisable as at December 31, 2012:
Exercise Price
Outstanding
Number outstanding Remaining contractual life (years) $ 1.00 865,667 1.16 $ 0.94 23,250 4.68 $ 1.77 9,333 4.48 $ 1.98 16,686 3.36
914,936 1.32
As at December 31, 2012, all outstanding options were exercisable (September 2012 - 914,936) and the weighted average exercisable price was $1.14 (September 30, 2012 - $1.14).
There were no options issued during the quarter ending December 31, 2012.
Subsequent to the quarter-end, the Company granted the following options for Common Shares (one option represents one Common Share):
$500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2011 FY 2012 FY2013 $ T ho us an ds Working Capital
• 235,000 options to non-executive directors • 745,500 options to officers and executive directors • 300,000 options to employees and consultants
These options were granted at an exercise price of $1.45 and they expire five years from their respective dates of grant.
4.3.
Capital expenditures
Capital expenditures by cash for the three months ended December 31, 2012 was $25, compared with $27 for the prior year comparative period. The capital expenditures are comprised of the purchase of new computer equipment for the period and intangibles related to the ERP system.
We anticipate increases in capital expenditures with our expected growth in operations and infrastructure.
4.4.
Line of credit
On November 15, 2010, the Company secured a revolving, demand facility with a Canadian chartered bank, which allows for a borrowing limit of up to $1.5 million, subject to certain conditions. As at December 31, 2012, there was $1,500 available under this facility (December 31, 2011 - $944). The facility is secured by a first ranking security interest over all personal property of the Company. In addition, the facility contains certain financial and other covenants that the Company is required to comply with. The Company had no borrowings outstanding with respect to the operating line of credit (December 31, 2011 - $nil). The Company has not used this facility to date.
5. RELATED PARTY TRANSACTIONS
There were no related party transactions to disclose during the quarter or the prior year comparative.
6. COMMITMENTS
6.1.
Operating leases
We entered into leases for premises with the following total minimum annual payments:
Year ($ thousands)
2013 (9 months) 320
2014 426
2015 426
2016 250
2017 and later years 1,167
6.2.
Finance leases
We have entered into 36-month finance lease agreements with third parties for computer hardware. We recorded interest expense for the three months ended December 31, 2012 and 2011 of $0.02 and $0.1, respectively. The obligations under finance leases are secured by a lien on the equipment leased. Future minimum finance lease payments are as follows:
Year ($ thousands)
Q1 2013 $ 0.7
Present value of future minimum lease payments (includes imputed interest of $0.02)
less: Current Portion 0.7
Long-term portion of lease payments $ -
7. OUTSTANDING SHARE DATA
BSM’s authorized share capital consists of an unlimited number of common shares. As at December 31, 2012, there were 28,578,712 outstanding common shares, including 54,782 common shares remaining in escrow, the release of which is subject to performance conditions in terms of attaining certain cash flow levels.
As at December 31, 2012, there were 914,936 outstanding options to acquire common shares to directors and employees of the Company at a weighted average price of $1.14.
As of December 31, 2012, the Company had no outstanding warrants to acquire common shares.
8. NON-GAAP & NON-IFRS MEASURES
8.1.
Identification of non-GAAP and non-IFRS measures
This MD&A contains references to certain financial measures that do not have any standardized meaning prescribed by GAAP and IFRS and may not be comparable to similar measures presented by other entities. These non-GAAP and non-IFRS financial measures should be viewed as a supplement to, and not a substitute for the Company’s results of operations reported under IFRS. These financial measures are identified and defined below: “EBITDA”, “EBITDA per share”, “Adjusted EBITDA” and “Adjusted EBITDA per share” are measures of our operating profitability. We believe that EBITDA and Adjusted EBITDA provide useful information to our investors because they exclude transactions not related to the core cash operating business activities, allowing meaningful analysis of the performance of our core cash operations.
EBITDA is an indicator of the financial results generated by our business activities excluding: • the impact of any financing activities;
• amortization of property and equipment and intangible assets; • write-off of goodwill;
• taxes of the various jurisdictions; and
• non-cash compensation activities, such as share-based compensation, which can vary significantly with changes in the price of our common shares.
Adjusted EBITDA is a further refinement of EBITDA to remove the effect of: • restructuring and severance costs; and
• costs related to legal actions.
As such, Adjusted EBITDA provides more meaningful continuity with respect to the comparison of our operating results over time. EBITDA and Adjusted EBITDA are derived from the consolidated statements of operations, comprehensive income and retained earnings. EBITDA per share and Adjusted EBITDA per share are derived by dividing EBITDA and Adjusted EBITDA by the basic weighted average number of shares. We believe that using these metrics enhances an overall understanding of the Company’s results and we present them for that purpose.
8.2.
Reconciliation of non-GAAP and non-IFRS measures
EBITDA and Adjusted EBITDA are calculated as follows:
Three months ended December 31
($ thousands) 2012 2011 Better (Worse)
Net income (loss) as reported $ 823 $ 90 $ 733
Add (deduct):
Interest, net (26) (19) (7)
Amortization 105 73 32
EBITDA $ 902 $ 145 $ 757 Weighted average number of shares - basic 28,523,930 29,270,830 746,900 Weighted average number of shares - diluted 28,730,084 29,270,830 540,746 EBITDA per share – basic $ 0.032 $ 0.005 $ 0.027 EBITDA per share - diluted $ 0.031 $ 0.005 $ 0.026
Add (deduct):
Restructuring costs - 75 (75)
Costs related to legal actions - 168 (168)
Adjusted EBITDA $902 $ 388 $514
Adjusted EBITDA per share - basic $ 0.032 $ 0.013 $ 0.019 Adjusted EBITDA per share - diluted $ 0.031 $ 0.013 $ 0.018
9. OFF-BALANCE SHEET ARRANGEMENTS
As at December 31, 2012, BSM does not have any off-balance sheet arrangements, other than lease commitments as disclosed in this MD&A.
10. CRITICAL ACCOUNTING POLICIES
This MD&A has been prepared with reference to the unaudited consolidated financial statements for the three months ended December 31, 2012 and the notes thereto, which has been prepared in accordance with IFRS. The Audit Committee of the board of directors reviews the accounting policies and all quarterly filings and recommends approval of the consolidated financial statements to the board of directors. In preparing this interim MD&A, the significant judgements made by management in applying the Company’s accounting policies were the same as those that applied to the MD&A for the year ended September 30, 2012.
10.1. Critical accounting estimates
The preparation of financial statements requires management to use judgment in applying its accounting policies and estimates and assumptions about the future. Estimates and other judgments are continuously evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. In preparing this interim MD&A, the key sources of estimation uncertainty made by management were the same as those that applied to the MD&A for the year ended September 30, 2012.
11. FINANCIAL INSTRUMENTS AND CAPITAL DISCLOSURE
11.1. Fair values
The carrying values of cash and cash equivalents, accounts receivable, investment tax credits receivable and accounts payable and accrued liabilities approximate their fair values due to the short-term maturity of these financial instruments. The difference in fair value and carrying value of net investment in finance leases is considered to be insignificant given the limited movement in market rates of interest the initial recognition of these of these assets.
11.2. Capital disclosures
BSM manages its capital structure with the objective of providing sufficient resources to meet day-to-day operating requirements; to allow it to enhance existing product offerings as well as develop new ones; and to have the financial ability to expand the size of its operations by taking on new customers. In managing our capital structure, we take into consideration various factors, including the growth of our business and related infrastructure and the up-front cost of taking on new customers. BSM’s officers and senior management are responsible for managing our capital and do so through quarterly meetings and regular review of financial information.
BSM’s Board of Directors is responsible for overseeing this process. They manage our capital to ensure that there are adequate capital resources while maximizing the return to shareholders through the optimization of the debt and equity balance.
Refer to Note 12 on financial instruments and capital disclosure in the unaudited interim consolidated financial statements for the three months ended December 31, 2012.
12. SUBSEQUENT EVENTS
12.1. Stock Options
On January 15, 2013, the Company granted the following options for Common Shares (one option represents one Common Share):
• 235,000 options to non-executive directors • 745,500 options to officers and executive directors • 300,000 options to employees and consultants
These options were granted at an exercise price of $1.45 and they expire five years from their respective dates of grant.
12.2. Financing
On February 28, 2013, the Company completed a fully marketed prospectus offering (the “Offering”) of 6,160,665 common shares for gross proceeds of $8,624,931 at a price of $1.40 per common share. Net proceeds from the Offering were approximately $7,757,435 after related costs including agents’ commissions of $517,496 and other issuance costs of approximately $350,000. In addition, the agents received compensation options to acquire up to an aggregate of 431,246 common shares exercisable at a price of $1.40 per common share until February 28, 2014. The net proceeds from the Offering are expected to be used by the Company for business expansion, research and development, sales and marketing, product expansion and general working capital purposes.
The impact of this transaction if the Offering was in effect at the beginning of the quarter on the fully diluted EPS calculation for the three months ended December 31, 2012, is as follows:
Fully diluted EPS, after financing: $0.024
13. RISK AND UNCERTAINTIES THAT COULD AFFECT FUTURE RESULTS
Refer to Note 12 on financial instruments and capital disclosure in the quarter ended December 31, 2012 unaudited interim consolidated financial statements for additional details.
13.1. Risk factors
In addition to the other information contained in this Report, the following factors should be carefully considered in evaluating our business and prospects.
The risks and uncertainties described below are intended to be ones that are specific to us or our industry and that we deem material, but they are not the only ones that we face.
a) Potential acquisitions and investments
The Company expects to continue to acquire or invest in businesses, products and technologies that expand or complement the Company's current business or products. Such acquisitions or investments may involve significant commitments of financial or other resources of the Company. There can be no assurance that any such acquisitions
or investments will generate revenue, income or other returns for the Company, or that financial or other resources committed to such activities will not be lost. Such activities could also place additional strains on the Company's administrative and operational resources and its ability to manage growth.
b) Volatility in stock price
The market price of the Company's Common Shares can be highly volatile and subject to fluctuations. These fluctuations in market price may continue due to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts or other events or factors. In addition, the financial markets have experienced significant price fluctuations that have particularly affected the market price of equity securities of many high technology companies, and that have been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a particular quarter. These fluctuations may be exaggerated if the trading volume of our common stock is low.
c) Credit risk
Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk from its customers and cash and cash equivalents. The trade receivables have an exposure to economic downturns. Most of the Company’s customers are not independently rated, therefore the quality of the customer is considered by taking into account its financial position, past experience and other factors. The utilization of credit limits is regularly monitored to minimize this risk. The Company’s foreign trade receivables are insured by Export Development Canada (“EDC”) and have minimal risk.
The Company reviews its trade accounts receivable regularly and reduces amounts to their expected realizable values by making an allowance for doubtful receivables, as soon as the accounts are determined not to be fully collectible.
As at December 31, 2012, trade accounts receivable of $1,235 (September 30, 2012 - $623) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The allowance for doubtful accounts is charged against income and included in general and administrative expenses. Shortfalls in collections are applied against this provision.
The Company also has credit risk relating to cash and short term investments, which it manages by dealing with large chartered banks and investing with organizations with a minimum credit rating of ‘A’.
d) Competition
The Telematics business, in which the Company is engaged is intensely competitive, fragmented, subject to rapid technological change and requires frequent new content, service introductions and enhancements. Many of the Company's existing competitors are significantly larger and have substantially greater financial, technical, personnel, marketing and other resources than the Company. The Company may also face future competition from new services. There can be no assurance that the Company will be able to successfully compete with such competitors and competitive pressures may result in downward pressure on subscriptions, subscription rates and hardware revenues. The Company competes on the basis of its track record of performance, its experienced management and workforce, its competitive pricing, and its superior products and solutions approach.
e) Foreign currency risk
The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the Euro. Foreign exchange risk arises on recognized assets, liabilities, trade receivables and trade payables. Foreign exchange risk arises when future recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. The Company’s objective in managing its foreign currency risk is to minimize its net exposures to foreign currency cash flows. As the Company has revenues generated as well as expenses incurred in non-functional currency, it manages its foreign currency risk by self-hedging to the extent practical. The Company recognized a foreign currency exchange loss in the quarter ended December 31, 2012 of $7 (2011 – loss of $8).
If a shift in foreign currency exchange rates of 10% were to occur (and all other variables held constant), the foreign currency exchange gain or loss on the Company’s net financial assets could be valued at plus or minus $222 due to the fluctuation and this would be recorded in the consolidated statements of operations and comprehensive loss.
f) Environment and market risk
Sales are subject to some conditions outside the Company's control such as economic cycles, the growth of complementary businesses such as corporate networks and software applications or events in specific industry verticals. The Company is a pioneer in the Telematics security and surveillance market, which is an evolving business. The liquidity and financial position of the Company is a function of the decisions it will have to make to successfully compete in these markets.
Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against.
Recent events have demonstrated that businesses and industries throughout the world are very tightly connected to each other. Thus, events seemingly unrelated to us, or to our industry, may adversely affect our finances or operations in ways that are hard to predict or defend against. For example, credit contraction in financial markets may hurt our ability to access credit when it is needed or rapid changes in foreign exchange rates may adversely affect our financial results. Finally, a reduction in credit, combined with reduced economic activity, may adversely affect businesses and industries that collectively constitute a significant portion of our customer base. As a result, these customers may need to reduce their purchases of our products, or we may experience greater difficulty in receiving payment for the products that these customers purchase from us. Any of these events, or any other events caused by turmoil in world financial markets, may have a material adverse effect on our business, operating results, and financial condition.
14. FURTHER INFORMATION
Additional information relating to the Company is available on SEDAR at www.sedar.com.
15. CERTIFICATION
16. FORWARD LOOKING STATEMENTS
Certain statements in this Management’s Discussion and Analysis (“MD&A”) may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company and its subsidiaries, or the industry in which they operate, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “estimate”, “believe”, “anticipate”, “intend”, “expect”, “plan”, “may”, “should”, “will”, the negative thereof or other variations thereon or comparable terminology are intended to identify forward-looking statements. Such forward-looking statements reflect the current expectations of the management of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those expressed or implied by those forward-looking statements, such as significant changes in market conditions, the inability of the Company to close sales and the inability of the Company to attract sufficient financing and including the risk factors summarized above under the heading “Risk Factors” and in documents filed with the securities regulatory authorities. New risk factors may arise from time to time and it is not possible for management of the Company to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance or achievements of the Company to be materially different from those expressed or implied in such forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements contained in this MD&A speak only as of the date hereof. The Company does not undertake or assume any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.
