Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the attached financial statements and notes thereto. Except for the historical information contained herein, the matters discussed below are forward-looking statements that involve certain risks and uncertainties, including, among others, the risks and uncertainties discussed below.
OVERVIEW
Management’s objective for the three months ended September 30, 2009 was to improve overall operations to reduce the need for external financing in the difficult economic and financial markets. We continued our focus on consolidation of our entities. We have been actively engaged in seeking additional external financing
and other strategic partnerships and relationships to further enhance the scale, depth and profitability of the business
In the three months ended September 30, 2009, we had a net loss of $(3,052,220) ($0.04)per share basic and diluted), as compared to a net loss of $1,145,947 ($0.04 per share basic and diluted) in the three months ended September 30, 2008. The increase in the losses year on year was predominantly as a result of costs and SEC accounting provisions
associated with the Semotus transaction which is non recurring. Our overall cash decreased by $ 1,212,545 in the three months ended September 30, 2009, compared to a decrease of $80,744 in the three months ended September 30, 2008.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
REVENUES
Revenues for the three months ended September 30, 2009 increased 349.7% to $14,504,855 as compared to $3,225,251for the three months ended September 30, 2008. This increase is primarily due to the acquisition of the six subsidiaries of China Voice Holding, Corp. (CHVC) and growth of our wholesale call traffic business.
COST OF REVENUES AND GROSS MARGIN
The overall gross margin has improved in the three months ended September 30, 2009 versus 2008 due to the launch of our own branded calling cards through one of our subsidiaries, Wize Communications. Our own brand calling cards enable us to
increase margin by selling our high margin products through our existing strong distribution channels.
OPERATING EXPENSES
Operating expenses increased 140.4% to $2,556,911 in the three month period ended September 30, 2009 versus $1,063,450 for the same period in the last fiscal year.
Operating expenses consist of general and administrative expenses, including payroll, accounting, legal, consulting, rent and other overhead costs. This category also includes stock compensation and option expense, the costs associated with being a publicly traded company, including the costs of SEC filings, a management fee payable to Flint,
Ltd., investor relations and public relations. These costs have decreased during the three months ended September 30, 2009 versus 2008 due to cost savings that have been achieved by the business following the full integration of the six companies acquired from China Voice Holding Company.
The non-cash charges for compensation consist mainly of the grants of stock issued as part of settlements for services rendered. The common stock issued was valued at its fair market value at the date of issuance.
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INTEREST EXPENSE
The $1,176,754 for the three months ended September 30, 2009 in interest expense is related to accrued interest on the convertible and promissory notes, as well as the amortization of the debt discounts related to those notes. The other component is exchange gains and losses from currency transactions in the Euro and
U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Overall cash decreased by $1,212,545 for the three months ended September 30, 2009 due to a continued loss from operations, and delays in the private offerings that only partially closed as of June 30, 2009, and which we previously expected to fully close during the fiscal year ending June 30, 2009. We were able to cover some of the cash loss
through proceeds from convertible and additional promissory note issuances. The sources and uses of cash are summarized as follows (unaudited):
Three Months Ended
September 30,
2009
2008
Net cash used in operating activities
($1,052,944)
$ (1,321,959)
Net cash used in investing activities
(133,603)
(6,287)
Net cash used in financing activities
(31,843)
1,493,386
Net cash provided by foreign currency activities
5,845
--
Net increase (decrease) in cash and cash equivalents
($1,212,545)
$ (80,744)
During the three months ended September 30, 2009, cash used in operating activities was $1,052,944 resulting from a gross loss of $3,052,220 and operating expenses of $2,556,911. The loss included non cash charges for stock and option compensation, accretion of debt discount of $582,858 and $804,371 respectively.
Other operating activities that increased cash were a decrease in accounts receivable of $134,715, of prepaid expenses of $8,724, Inventory of $399,565, due from related parties of $294,174 and an increase in accrued liabilities of $4,929 and accrued interest of $239,781. Operating activities that decreased cash were an increase
in deposits of $12,610, a decrease in cash overdraft of $100,842 and a decrease in accounts payable of $1,030,011.
Cash provided by financing activities for the three months ended September 30, 2009 consisted of an increase in the line of credit of $16,176, the sale of short term promissory notes, which provided $200,000 in cash, the issuance of notes payable of $115,000 to related parties, and the redemption of preferred stock in the amount
of $363,019.
$5,845 of cash was used in foreign currency transactions related to exchange losses on convertible notes payable during the three months ended September 30, 2009 and $245,883 was provided by foreign currency exchange gains in the three months ending 30 September 2008.
As of September 30, 2009, we had cash and cash equivalents of $124,457, a decrease of $1,212,545from the balance at June 30, 2009, which was $1,337,002. Our working capital deficit increased as of September 30, 2009 to ($10,260,012) as compared to a working capital deficit of ($12,071,300) at June 30, 2009 . We
have not yet generated sufficient revenues to cover the costs of continued product and service development and support, sales and marketing efforts and general and administrative expenses
We are still largely dependent on financing in order to generate cash to maintain its operations. We are currently investigating the capital markets for additional financings. However, there is no assurance that any additional capital will be raised. We closely monitor our cash balances and our operating costs in order to maintain
an adequate level of cash.
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FORWARD LOOKING STATEMENTS
Certain statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,”
“estimates,” “we believe,” “could be,” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, risks associated with the
integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of the Company’s significant contracts or partnerships, the Company’s inability to maintain working capital requirements to fund future operations or the Company’s inability to attract and retain highly qualified management, technical and sales personnel, changes in laws regulating telecommunications
providers, changes in laws affecting the telecommunications products and services we provide. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.