Mr. Raymond Richard reports
GINSMS INC.: PERFORMANCE HIGHLIGHTS FOR THE THREE AND TWELVE MONTHS ENDED MARCH 31, 2012
GINSMS Inc. has released its financial results for the fourth quarter and year ended March 31, 2012, and has made a change in the share purchase agreement related to its planned acquisition of Inphosoft Group Pte. Ltd.
Performance highlights for the three and 12 months ended March 31, 2012:
During the 12-month period ended March 31, 2012, GINSMS incurred
substantially higher professional and consultancy fees resulting from
its planned acquisition of Inphosoft Group, a Singapore information technology mobile middleware solutions developer for mobile network operators, financial institutions, media companies and enterprises, for a
total consideration of $11.6-million, which has now been reduced to
$11.3-million. This increase in professional and consultancy
fees combined with lower revenue affected earnings before interest, taxes, depreciation and amortization for the quarter ended
March 31, 2012, which dropped by $291,671 compared with a negative $325,987
during the corresponding quarter the previous year. For the 12-month
period, EBITDA was a negative $345,348, compared with a positive EBITDA of
$15,847 for the corresponding period the previous year.
- Volume of inter-SMS traffic for the three-month period ended March 31,
2012, was down by 25.8 per cent to 28.2 million from the same period the previous
year. When compared with the previous quarter ended Dec. 30, 2011,
traffic is down by 11.4 per cent. GINSMS believes that this downward trend in
SMS traffic is partly caused by cellphone users migrating to mobile
instant messaging applications, such as Research in Motion's
BlackBerry Messenger, Apple's Imessage or other cross-platform
mobile messaging applications, such as WhatsApp. This migration enables
smart phone users to send MIM using device data channel or WiFi.
- Gross margin improved slightly during the fourth quarter to 55.0 per cent from
50.5 per cent due principally to
savings from the disposal of the K-Matrix platform. For the 12-month
period, gross margin improved from 55.8 per cent during the corresponding period
the previous year to 60.9 per cent.
- As a result of the expenses incurred for the acquisition of Inphosoft,
liquidity weakened with a working capital of $614,907 as at March 31,
2012, compared with $957,343 as at March 31, 2011. The working capital
ratio declined from 12.3 times at year-end to 5.1 times, respectively.
RESULTS OF OPERATIONS
period ended Year ended
March 31, March 31,
2012 2011 2012 2011
Revenues $158,652 $179,542 $686,934 $785,615
Cost of sales (71,378) (88,845) (268,454) (347,184)
Gross profit 87,274 90,967 418,480 438,431
Gross margin 55.0% 50.5% 60.9% 55.8%
EBITDA (1) (325,987) (34,316) (345,348) 15,847
EBITDA margin (205.5)% n/a (50.3)% 2.0%
Net earnings (367,239) (60,616) (493,704) (96,536)
Net earnings margin (231.5)% (33.8)% (71.9)% (12.3)%
(1) Earnings before interest, taxes, depreciation and amortization
(share-based compensation included) are a non-generally accepted
accounting principles measure related to cash earnings.
Financial review for the three- and 12-month period ended March 31, 2012
Revenue for the third quarter ended March 31, 2012, was $158,652, representing a reduction of 11.6 per cent over revenue of $179,542 reported during the same three-month period the previous year. The reduction in revenue is due essentially to a 25.1-per-cent drop in SMS traffic during the quarter, compared with the corresponding quarter the previous year. As noted herein, GINSMS believes that the lower trend in SMS traffic is partly caused by cellphone users migrating to MIM applications, such as Research in Motion's BBM, Apple's Imessage or other cross-platform mobile messaging applications, such as WhatsApp, Skype or Google Talk. Given that most smart phone users now have inclusive data plans, they can forward their MIM at a fraction of the cost required to send an SMS. In addition, Hong Kong MNOs have been upgrading in the last two years their networks from 2G to 3G causing network downtime and interruptions. Finally, aggressive relay fee promotions adopted by GINSMS's competitors added downward pressure on SMS traffic volume.
Management anticipated this downward trend in SMS traffic and took steps to encourage SMS usage through, in part, the implementation of a new pricing structure and the introduction of bundled fees. GINSMS's management also believed that the addition of VAS to its service offering would create new revenue streams and stimulate growth. To this end, GINSMS initially decided in 2010 to acquire an e-mail marketing platform called K-Matrix eM developed by K-Matrix Group, a Hong Kong-based developer of analytics tools and systems for gathering digital intelligence. This platform, however, eventually proved to be too onerous to implement and was later abandoned.
Following GINSMS's decision not to proceed with the acquisition of the K-Matrix marketing platform, GINSMS initiated discussions with Inphosoft Group, a Singapore IT mobile middleware solutions developer for MNOs, financial institutions, media companies and enterprises which provide innovative mobile data services and solutions. These discussions led, on Jan. 12, 2012, to a definitive agreement between the two parties whereby GINSMS will, subject to regulatory and exchange approval, acquire 100 per cent of the shares of Inphosoft for a consideration of $11.6-million.
With the addition of Inphosoft, the company will be able to introduce a series of VAS immediately that will enhance GINSMS's product offering and transform it into an innovative revenue-powering mobile service and solution provider. GINSMS expects that the acquisition will boost its revenue in Hong Kong and create renewed interest on its Iosms platform. The acquisition of Inphosoft will result in synergies and immediate cost savings as Inphosoft is expected to take over software maintenance work associated by the company's Iosms platform.
Net income for the quarter dropped by more than 500 per cent to $367,239. This is due to two main factors: (i) a near five-fold increase in professional fees and (ii) a four-fold increase in consultancy fees. The length and complexity of the negotiations leading to the acquisition of Inphosoft and the requirements and conditions imposed by the securities regulation and the TSX Venture Exchange on GINSMS to complete the acquisition of Inphosoft have resulted in a substantial increase in the professional fees of GINSMS, which jumped from $48,030 in the fourth quarter of fiscal 2011 to $258,439 during the fourth quarter of the current fiscal year. Also as a result of the contemplated acquisition and the need to obtain the services of an agent, namely Raymond James Ltd., and a business valuation firm, namely BDO Canada LLP, as required by the TSX Venture Exchange, consultancy fees also increased substantially, jumping from $21,233 in the fourth quarter of fiscal 2011 to $84,146 during the fourth quarter of fiscal 2012.
The increase in professional and consultancy fees accounted for 89.2 per cent of the increase in the loss of $367,239 recorded in the fourth quarter this year. Also affecting results in the fourth quarter is a share-based compensation charge of $29,429. This larger-than-normal quarterly charge is the result of a resolution by the board of directors in January, 2012, modifying the initial vesting period of the options granted to the directors of the company to make such options immediately vested and exercisable. Salaries and wages were up by 44.6 per cent, the result principally of an increase in the workload due to the planned acquisition of Inphosoft, necessitating a temporary adjustment in compensation.
For the 12-month period ended March 31, 2012, revenue dropped by 12.6 per cent to $686,934, compared with the corresponding period the previous year. The drop in revenue reflects the 4.3-per-cent decline in SMS traffic during the 12-month period ended March 31, 2012, compared with the same period the previous year. As mentioned previously, GINSMS believes that this downward trend in SMS traffic is partly caused by cellphone users migrating to MIM applications.
Net losses for the 12-month period this fiscal year were $493.704, an increase of 411 per cent over the losses of $96,536 recorded during the corresponding quarter the previous year. Gross profit increased from 55.8 per cent to 60.9 per cent accompanied by a 22.7-per-cent drop in the cost of sales due in part to the cancellation of the purchase of the K-Matrix eM marketing platform, which did not meet the company's expectations. The main reason for the increase in losses was the substantial increase in professional and consultancy fees incurred by the company with respect to the acquisition of Inphosoft, which increased by 164.2 per cent to $460,182. Share-based compensation charge totalling $43,727 also negatively affected results more than usual as explained herein.
Earnings before interest, taxes, depreciation and amortization are a useful indicator in measuring the company's ability to sustain long-term viable operations while resources are used to build the company in a difficult environment. EBITDA for the three-month period ended March 31, 2012, amounted to a negative $325,987, compared with a negative EBITDA of $34,316 for the corresponding period the previous year. For the 12-month period also ended on March 31, 2012, EBITDA was a negative $345,348, compared with a positive $15,847 the previous year. The incidence on net earnings resulting from the substantial increase in both professional and consultancy fees is the main reason for the drop in EBITDA for both periods.
On July 24, 2012, as agreed between the parties, the share purchase agreement has been amended to reflect a reduction in the purchase price of $300,000 for an aggregate consideration of $11.3-million. In the previous share purchase agreement, the cash portion of the transaction was set at $1.1-million, $700,000 payable upon the closing of the transaction and $400,000 within a period of 30 days, failing which this amount would be converted into a non-bearing promissory note. With this amendment, both parties also agreed to reduce the cash portion immediately payable upon the closing of the transaction to $400,000. The payment date of the remaining $400,000 has been extended until after the first anniversary of the transaction closing date. The rest of the share purchase agreement, which includes the issuance of non-interest-bearing convertible debentures for an aggregate principal amount of $10.5-million, does not change and remains binding upon the parties.
We seek Safe Harbor.