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Zanett Inc. Reports Operating Results (10-Q)

November 15, 2010 | About:
10qk

10qk

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Zanett Inc. (ZANE) filed Quarterly Report for the period ended 2010-09-30.

Zanett Inc. has a market cap of $13.32 million; its shares were traded at around $1.44 with and P/S ratio of 0.32. ZANE is in the portfolios of Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

General and administrative expenses for the third quarter of 2010 were $1,734,351 as compared to $1,921,374 in the third quarter of 2009, representing a decrease of $187,023 or 9.7%. In the third quarter of 2010 there was no expense for stock based compensation for employees and contractors as compared to an expense of $162,987 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 third quarter of 2010.

Our revenues were $35,155,185 for the nine months ended September 30, 2010 versus revenues of $31,795,705 for the nine months ended September 30, 2009, an increase of $3,359,480 or 9.6%. 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 13.4%. Selling and marketing expenses increased 3.2%, from $4,269,631 in the nine months ended September 30, 2009 to $4,405,101 for the first nine months of 2010.

General and administrative expenses for the first nine months of 2010 were $4,877,705 as compared to $5,620,186 in the first nine months of 2009, representing a decrease of $742,481, or 13.2%. This decrease is a result of stock based compensation of $481,775 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 nine months ended September 30, 2010.

Cash used in investing activities was $448,115 for the nine months ended September 30, 2010 compared to cash provided by investing activities of $160,347 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 $383,115 as well as $65,000 of contingent consideration payments in the third quarter of 2010, as compared to $317,657 and $242,829, respectively, paid in the third 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 September 30, 2010, the outstanding loan balance was $4,617,784 with available borrowings of $324,295. 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 first forbearance agreement, the advance rate was 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 forbearance term on August 21, 2010. On September 28, 2010, the Company extended the forbearance agreement to October 31, 2010. Under the forbearance agreement, as amended, the advance rate was reduced from 80% of the face amount of eligible accounts receivable to 62.5% of the face amount of eligible accounts receivable, the maximum revolving loan limit was reduced from $6,000,000 to $5,000,000, and 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. To date, the respective obligations of Bank of America and the Company remain in forbearance pursuant to the forbearance agreement, as amended.

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