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Zanett Inc. Reports Operating Results (10-Q)

August 16, 2010 | About:
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10qk

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Zanett Inc. (ZANE) filed Quarterly Report for the period ended 2010-06-30.

Zanett Inc. has a market cap of $15.48 million; its shares were traded at around $1.75 with and P/S ratio of 0.37.

Highlight of Business Operations:

General and administrative expenses for the second quarter of 2010 were $1,658,038 as compared to $1,921,374 in the second quarter of 2009, representing a decrease of $263,336 or 13.7%. In the second quarter of 2010 there was no expense for stock based compensation for employees and contractors as compared to $162,988 for the comparable period in 2009. In addition, reduced expenses in several other office related areas such as rent and IT infrastructure also contributed to the overall reduction in general and administrative expenses during the second quarter of 2010.

Our revenues were $22,458,022 for the six months ended June 30, 2010 versus revenues of $21,892,585 for the six months ended June 30, 2009, an increase of $565,437 or 3%. This increase in revenue can be attributed primarily to the continued focus and success of our sales, delivery and marketing teams. As a result, primarily, of this increase in revenues, costs of revenues also increased by 9% from $15,156,606 for the six months ended June 30, 2009 to $16,592,949 for the six months ended June 30, 2010. Selling and marketing expenses decreased 8%, from $3,055,711 in the six months ended June 30, 2009 to $2,820,157, for the first six months of 2010.

General and administrative expenses for the first six months of 2010 were $3,143,355 as compared to $3,807,902 in the first six months of 2009, representing a decrease of $664,547, or 17%. This decrease is a result of stock based compensation of $318,788 expensed in 2009 as compared to no expense in 2010. In addition, reduced expenses in several other office related areas such as rent and IT infrastructure also contributed to the overall reduction in general and administrative expenses during the six months ended June 30, 2010.

Cash used in investing activities was $244,831 for the six months ended June 30, 2010 compared to cash provided by investing activities of $366,170 for the corresponding period in 2009. The 2009 inflow primarily reflected proceeds of $720,833 from the PDI disposition. In 2010 we had additions to property and equipment of $184,831 as well as $60,000 of contingent consideration payments in the second quarter of 2010, as compared to $132,680 and $221,983, respectively, paid in the second quarter of 2009.

In March 2008 the Company sold all of the issued and outstanding common stock of PDI for cash to KOR Electronics. This transaction resulted in a cash payment of $8.7 million with a holdback amount of $875,000 that was paid to the Company on March 17, 2009. With the proceeds from this transaction, the Company repaid in full promissory notes in an aggregate principal amount of $3,000,000 owing to Bruno Guazzoni and approximately $5,000,000 of short term debt.

On January 22, 2009, the Company and ZCS entered into a Fifth Amendment and Modification to Loan and Security Agreement and Other Loan Documents with Bank of America, N.A. (“Bank of America”), as successor-by-merger to LaSalle. The amendment increased the maximum revolving loan limit to $6 million from $5 million and modified the fixed charge coverage ratio test required by the loan agreement. As amended, the loan agreement requires the borrowers to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 for the twelve month period ended on December 31, 2008 and each twelve month period ending on the last day of each fiscal quarter thereafter. In addition, the loan agreement also waived the EBITDA covenant for the November 2008 calendar month and terminated the EBITDA covenant as of the date of the amendment. Further, the amendment raised the face amount of the borrowers eligible accounts receivable from 60% to 80%. At June 30, 2010, the outstanding loan balance was $3,872,644 with available borrowings of $1,607,356. The credit facility matured on June 21, 2010 and the Company entered into a forbearance agreement with Bank of America on June 21, 2010 and amended the forbearance agreement on July 21, 2010, following expiration of the first forbearance term. Under the forbearance agreement, the advance rate is reduced from 80% of the face amount of eligible accounts receivable by 2.5% each Tuesday commencing on July 6, 2010, and continuing until the expiration of the current forbearance term on August 21, 2010. Under the forbearance agreement, interest on loans under the line of credit was increased by 2.0% to 5.0% per annum over the base rate of the revolving credit facility.

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