Form 10QSB for MODAVOX INC
Form 10QSB for MODAVOX INC--------------------------------------------------------------------------------
17-Jul-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION.
GENERAL
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OUR OPERATIONS SHOULD BE READ IN CONJUNCTION WITH FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS REFLECTING OUR CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THESE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE DISCUSSED UNDER BUSINESS- RISK FACTORS NOTED IN OUR 10KSB FOR THE YEAR ENDED FEBRUARY 28, 2006 AS FILED WITH THE SECURITY AND EXCHANGE COMMISSION.
Overview
The Company has accumulated losses aggregating $9,254,717 since inception. During this time period, we have developed software and an operating model for audio communications over the Internet, principally talk radio. On February 28, 2006 we acquired Kino Interactive ("Kino"), our Interactive Media Division, which produces and delivers digital online audio/visual media content that allows our customers, which include governments, colleges and universities and businesses, to communicate with, advertise to and sell products to targeted audiences. All Interactive products, which include ad streaming, website development, audio/video streaming and pay for view event production, are built around existing industry streaming media infrastructure to provide scalable, secure, and highly compatible whole solutions. Our products enable Internet and private networks to become successful broadcast channels. Our Interactive Media business generates revenue by selling custom client software applications for e-commerce, and digitized audio/video media content distribution and also, receives revenue for related hosting. Additionally, production and installation revenues are generated from the content creation process.
During the quarter ending May 31, 2006, the Company was focused on integrating the Kino Acquisition, which included integrating accounting records, employees and Kino products into the Modavox sales function. In addition, in March the Chairman of the Board resigned, which required the CEO and Vice Chairman to focus on the related Settlement Agreement and transition process. As a result of these distractions from the business development and marketing efforts, Interactive Media Division revenues did not meet expectations. However, the Company believes that potential contracts in the "Pipeline" present opportunities for the remainder of the fiscal year. In order to assist in achieving this potential, effective June 26, 2006, Nathaniel Bradley, Vice Chairman of the Board of Directors and a founder of Kino, will become a full-time employee as Executive Vice President of Business Development and Marketing Strategies.
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During the quarter ended May 31, 2006, we raised capital through the issuance of common stock of $269,501 net of related costs. We have reduced overdue payables and are engaged in discussions with the IRS concerning a payment plan for payroll taxes which were not paid between 2004 and October 2005. As a result of the merger with Kino, we have stockholders equity of $1,355,790 as of May 31, 2006. However, at that date we have negative tangible equity of $1,685,219. During this period, we issued warrants for services and common stock in settlement of liabilities. Accounting valuations of these items resulted in income statement charges of $356,000, thereby increasing our loss by that amount of non-cash charges.
During quarter ended May 31, 2006, the Company derived its revenues through production fees received from hosts and their sponsors featured on the talk radio content programs and from Interactive Media Division revenues. Production fees are generally sold in 13-week segments and are generally prepaid. Cash, or a portion thereof, is generally received by the Company at the time a Host contract is signed. The total amount to be received under the contract is amortized ratably into revenues over the production period, which may begin 20-60 days after the contract is signed. An increase or decrease in contract closings will immediately affect available cash and, increases or decreases in contract closings may not affect revenues for 30-60 days. In addition, sales commissions are expensed as the cash is received, which generally precedes the recording of revenues.
Interactive Media Division Revenues are derived from internet advertising products, event specific Online digital media content delivery, monthly hosting fees and website development. Monthly hosting fees are billed and recorded as revenues in the month that the hosting occurs and all other revenues are billed and recorded at the completion of the related project or event. As of May 31, 2006, there were three Interactive Media contracts in process for which cash received was recorded as deferred revenue. The developing nature of the market for Interactive Media Products generally results in lengthy time periods between the initiation of potential customer contracts and the closing of successful contracts. A portion of the contract amount is generally received at contract closing.
Operating expenses consist primarily of network operations, include the cost of technical personal and service costs and fees paid to third parties, including communication services providers. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, marketing, accounting, and administrative personnel and other general corporate expenses such as rent. Theses costs include commissions for sales personnel and fees paid to third parties.
In October 2005 the then Chairman and Chief Executive Officer resigned his Chief Executive Officer position and David J. Ide became the Chief Executive Officer. The company then began the process of reducing expenses with the objective of creating near term break even cash flow. In the quarter ending May 31, 2006 the company used $194,000 in operating activities however, this amount included $125,000 separation payment to the then Chairman of the Board of Directors, $31,500 in legal fees paid in connection with this separation & Kino merger, and $27,000 paid to the IRS to reduce the 2003 & 2004 unpaid payroll taxes and $20,000 to reduce overdue payables. While the IRS obligation and overdue payables will require the use of cash in the future the company believes that it is making progress in its effort to in the near term reach break even or positive cash flow from current operations.
Historically, the Company's revenues have been less than its expenses. As a result, the Company has been dependent on raising capital to continue its operations and continuation of operations is still dependent upon the Company's ability to raise sufficient capital to fund its operating deficiency, IRS obligation and overdue payables (see liquidity and capital resources).
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Results of Operations
The discussion of the results of operations compares the quarter ended May 31, 2006 with the quarter ended May 31, 2005, and the quarter ended May 31, 2005 with May 31, 2004, and is not necessarily indicative of the results which may be expected for any subsequent periods. Our limited operating history makes predicting future operating results very difficult. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risk and difficulties.
2006 VS. 2005
For the quarter ending May 31, 2006 revenues were $432,903 compared to $240,247.00 for the quarter ending May 31, 2005. Revenues for the quarter ended May 31, 2006 included $143,000.00 from the Interactive Media Division and $289,903 from the Broadcast Media Division while all revenues in the 2005 quarter were generated though the Broadcast Media Division.
Operating expenses were $121,802 in the 2006 May quarter compared to $156,552 in the prior quarter reflecting expense reductions and technological efficiencies realized through from the consolidating the company operations with Kino.
Selling, General, and Administrative expenses were $907,357 for the first quarter 2006 compared with $462,616 for the first quarter ending 2005.The 2006 first quarter included non-cash expenses of $356,341 arising from the valuation of warrants discussed in Note 3 and common stock issued to settle liabilities.. The 2006 expenses also included the $125,000 of expenses related to the separation of the then Chairman of the Board of Directors, and $44,000 of legal fees related to this separation and the Kino Merger.
Depreciation and amortization expense was $90,990 in the 2006 quarter compared with $12,179 in the 2005 quarter. The 2006 amortization expense includes $78,600 from software acquired in the Kino Acquisition.
Interest expense was $535 in the 2006 quarter compared with $118,775 in the 2005 quarter. The reduction in interest expense is the result in 2005 in the conversion of outstanding debt into common stock.
The net loss of $669,233 in 2006 compared to the loss of $509,875 in the 2005 quarter. The loss in 2006 was impacted by the valuation of stock and warrants discussed above and the separation and merger expenses. These items and the additional amortization expense arising from the intangible assets acquired in the Kino merger offset the increase in revenues, the reduction in interest expense, and the reduction in operating expenses.
2005 VS. 2004
Revenues for the quarter ending May 31, 2005 were $240,247 a decline of $70,334 of 23% from the comparable quarter of the previous year. This decline was due to reduced contract closings in the months preceding the start of the quarter due principally to the reorganization of the company that was being finalized at the time. Subsequently, contract closings have increased and the company anticipates increased revenues in future quarter.
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Costs of production were $290,268, a reduction of $95,228 of 25% from the comparable period of the prior year. This decline occurred as a result of the previously discussed reorganization which resulted in outsourcing of production function and reduction of personnel.
General and administrative expenses were $328,900, a reduction of $99,402 of 23% from the comparable period of the prior year. This reduction results principally from a reduction in payroll expenses as a result of the reorganization previously discussed.
Interest expense was $118,775 an increase of $109,053 due the interest cost of the convertible notes.
Other income of $273,026 in 2004 arose from the return of common stock. There was no comparable transaction in 2005.
The net loss of $(509,875) in 2005 was greater than the net loss of $(245,989) in 2004 because of the other income of $273,026 in 2004 and the increased interest expense offset the net benefit from expense reductions in 2005 arising from the reorganization.
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LIQUIDITY AND CAPITAL RESOURCES
During the Quarter ended May 31, 2006 cash generated from revenues was not adequate to pay the Company's Operating Expenses and overdue obligations. During the quarter ended May 31, 2006 we raised $269,501.00 through the issuance of common stock. As of May 31, 2006, the Company had not paid all outstanding delinquent payroll taxes and overdue payables from fiscal 2004 & 2005. At May 31, 2006 the overdue payroll taxes, including interest and penalties, aggregated approximately $278,364 and $240,762 of accounts payable were past their scheduled due dates.
During the quarter ended May 31 2006 cash used in operations of $194,000 was funded through capital raised through the issuance of common stock. Included in the cashed used in operations were the separation payment to the then Chairman of the Director of the Board of $125,000.00, $31,500 in legal expenses arising from the separation and Kino merger, and $27,000 paid to the IRS for 2003 & 2004 unpaid payroll taxes.
During the year ended February 28,2006, all convertible debt and related accrued interest was converted into common stock. Therefore at May 31, 2006 the only debt outstanding was a bank loan aggregated $20,000 which is due on demand and an equipment financing obligation of $2,311 which is due monthly through 2007.
In connection with the Kino Merger, the Company issued mandatory redeemable preferred stock. During the Quarter ended May 31, 2006, the Company redeemed $125,000 of this stock. Also, during the quarter ending May 31,2006, the company issued warrants and stock for services, which increased additional paid-in capital, the net loss and the accumulated deficit by $356,000, but did not require the use of cash.
The Company believes that its required capital expenditures for fiscal 2006 will not exceed $200,000.
As noted above the company has not historically had adequate cash or projected cash flow to fund its operations and continuation of its operations is dependent upon its ability to raise additional capital through equity and debt issuance until the company can achieve its goal of positive cash flow. While the company is making progress in achieving this objective, the current negative operational cash flow and its obligation to the IRS for 2003 & 2004 unpaid payroll taxes will necessitate continued capital raising. In July, 2006, Warrants for 300,000 shares of common stock were exercised for $75,000 in order to facilitate a $100,000 payment on July 17,2006 to the IRS for previously unpaid payroll taxes.
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RISK FACTORS
PLEASE SEE FORM 10KSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2006 FOR COMPANY RISK FACTORS. IN ADDITION TO THE RISK FACTORS DISCLOSED IN FORM 10KSB, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED:
"THE INTERNAL REVENUE SERVICE COULD SEIZE THE COMPANIES LIQUID ASSETS AS A RESULT OF THE LIEN FILED ON MAY 1, 2006."
As a result of the lien which the IRS filed against the Companies assets, it is possible for the IRS to seize the Companies liquid assets, thereby potentially eliminating the Companies ability to conduct future operations.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by management. Words such as "anticipate," "expect," "intend" "plans," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language appearing elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents we file from time to time with the Securities and Exchange Commission, including in our Annual Report Form 10-KSB for our fiscal year ended February 28, 2006.
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