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Item 2. Management’s Discussion and Analysis

2011-05-27 compared with 2011-05-26 · 43 added, 46 removed, 44 unchanged (67% of the section changed)

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.

Management’s objective for the three and nine months ended March 31, 2011 was to improve overall operations to reduce the need for external financing in the difficult economic and financial markets.

We continued our focus on growing our prepaid card business.

FORWARD LOOKING STATEMENTS

Certain statements contained in this report may constitute forward-looking statements.

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 disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Management’s objective for the three and six months ended December 31, 2010 was to improve overall operations to reduce the need for external financing but also to position the Company for growth in existing markets and new areas such as mobile payments and remittances.

The company continues to target suitable acquisitions to enhance the profitability from sustainable, higher margin, revenue streams.

We continued our focus on growing our prepaid telecom segment that resulted in increased revenues over the period last year but a lower gross margin due to a change in product offerings for the period.

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 March 31, 2011, we had a net loss of $2,151,846 ($0.05 per share basic and diluted), as compared to a net loss of $8,509,926 ($2.06 per share basic and diluted), in the three months ended March 31, 2010.

We had a net loss of $6,463,091 ($0.25 per share basic and diluted) in the nine months ended March 31, 2011, as compared to a net loss of $21,616,123 ($5.49 per share basic and diluted) in the nine months ended March 31, 2010.

The decrease in the losses year on year was a direct result of a one time impairment charge of goodwill and other intangibles in the amount of $12,215,200, along with some other exceptional operational costs relating to the closing of non-profitable businesses as of March 31, 2010, that were acquired as part of the CHVC transaction in 2009.

Management felt it prudent to revalue the businesses acquired in 2009 at this time based on this action.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010

Revenues for the three months ended March 31, 2011 increased to $3,779,682 as compared to $2,862,261 for the three months ended March 31, 2010.

Revenues for the nine months ended March 31, 2011 increased to $12,640,351 as compared to $11,537,215 for the nine months ended March 31, 2010.

This increase is primarily due an 151% increase in revenues in our software and equipment segment on increased orders for cable equipment which is expected to continue throughout 2011 and a 2.7% growth in sales our third party calling products.

In the three months ended December 31, 2010, we had a net loss of $2,221,663 ($0.10 per share basic and diluted), as compared to a net loss of $10,053,978 ($2.62 per share basic and diluted) in the three months ended December 31, 2009.

We had a net loss of $4,311,246 ($0.26 per share basic and diluted) in the six months ended December 31, 2010, as compared to a net loss of $13,106,197 ($3.37 per share basic and diluted) in the six months ended December 31, 2009.

The decrease in the losses year on year was a direct result of the ceasing of non-profitable businesses, in February 2010, that were acquired as part of the CHVC transaction in 2009 and managements focus on operational cost rationalization during 2010.

Operating losses reduced by 48% in the six months ended December 31, 2010 compared to the same period last year.

Our overall cash increased by $66,892 in the six months ended December 31, 2010, compared to a decrease by $1,049,752 in the six months ended December 31, 2009.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009

Revenues for the three months ended December 31, 2010 increased 7% to $4,423,909 as compared to $4,134,368 for the three months ended December 31, 2009.

Revenues for the six months ended December 31, 2010 increased 2% to $8,860,669 as compared to $8,675,006 for the six months ended December 31, 2009.

This increase is primarily due to growth in the both the equipment and prepaid segments.

COST OF REVENUES AND GROSS MARGIN

While the overall gross margin increased by 3.8% during the three months ended March 31, 2011 versus the three months ended March 31,2010 primarily due to revenue mix of higher margin products in the quarter, the overall gross margin percentage has decreased by 2% in the nine months ended March 31, 2011 versus 2010 due to lower margins generated on the prepaid products sold as a result of increased competition in the segment which represent 89% of revenues for the nine month period.

Gross margin decreased to $183,137 (4.1%) and $432,004 (4.9%) respectively in the three and six months ended December 31, 2010 from $423,254 and $768,126 in the three and six months ended December 31, 2009.

This decrease was primarily due to a changing product mix during 2010 and the loss of higher margin destinations for the prepaid segment from the previous year.

OPERATING EXPENSES

Operating expenses in the three months ended March 31, 2011 decreased by 28% to $1,620,765 as compared to $2,234,906 in the three month period ended March 31, 2010, and decreased by 42% to $3,664,910 during the nine month period ending March 31, 2011 as compared to $6,373,512 in the nine month period ended March 31, 2010.

Operating expenses decreased by 28% to $1,356,329 in the three month period ended December 31, 2010 versus $1,872,192 for the same period in the last fiscal year, and decreased 51% to $2,044,145 in the six month period ended December 31, 2010 versus $4,138,606 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 decreased in the three months ended March 31, 2011 primarily due to one time stock compensation costs of approximately $800,000 issued to departing management as part of the corporate restructuring during the three months ended March 31,2010

The non-cash charges for compensation consist mainly of the grants of stock issued for services rendered.

The reduction in operating costs was due to management’s focus on cost rationalization throughout 2010, after an increase in operating costs of $597,312 resulting from the acquisitions of III and P2P in October 2010.

The non-cash charges for compensation consist mainly of depreciation and amortization charges for fixed and intangible assets and 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 and do not represent any cash payments.

INTEREST EXPENSE

Interest expense decreased to $812,127 for the three months ended March 31, 2011 as compared to $1,004,401 in the three months ended March 31, 2010, and increased to $3,467,920 as compared to $2,953,136 during the nine months ended March 31, 2011 versus 2010.

Interest expense is related to accrued interest on the notes payable and convertible and promissory notes, as well as the amortization of the debt discounts related to those notes.

The amount of interest charges related to accounting for debt discounts that did not involve the payment of cash amounted to $1,903,314.

The $1,074,034 and $2,655,783 for the three and six months ended December 31, 2010, respectively, in interest expense is related to accrued interest on the convertible and promissory notes, as well as the amortization of the debt discounts related and beneficial conversion features to those notes.

The other component is exchange gains and losses from currency transactions in the Euro and U.S.

The amount of interest charges related to accounting for debt discounts and beneficial conversion features that did not involve the payment of cash amounted to $1,519,674.

LIQUIDITY AND CAPITAL RESOURCES

Overall cash increased by $26,149 for the nine months ended March 31, 2011 due to management’s focus on maximizing the use of cash in the business to minimize the amounts of capital required to be raised from outside sources.

Overall cash increased by $66,892 for the six months ended December 31, 2010.

The sources and uses of cash are summarized as follows (unaudited):

Nine Months Ended

Six Months Ended

Net cash used in operating activities

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Net cash provided by financing activities

Exchanage gain (loss) on debt

Net cash used in foreign currency activities

Net increase (decrease) in cash and cash equivalents

During the nine months ended March 31, 2011, cash used in operating activities was $830,997 resulting from a gross profit of $673,905 and operating expenses of $3,664,910.

The loss included non cash charges for stock and option compensation of $808,196, accretion of debt discount of $1,141,870 and amortization of beneficial conversion feature of $761,444 and depreciation and amortization charges of $710,177.

During the nine months ended March 31, 2010, cash used in operating activities was $2,052,956 resulting from a gross profit of $842,311 and operating expenses of $5,531,201.

The loss included non cash charges for stock and option compensation of $2,483,095 and accretion of debt discount of $1,576,359.

Other operating activities that increased cash during the nine months ended March 31, 2011 were a increase in accounts payable of $465,731, reduction in inventories of $140,427, an increase in the cash overdraft of $34,398 and accrued liabilities $440,448.

Operating activities that decreased cash included a increase in accounts receivable of $543,149 and an increase in prepaid expenses of $29,421 and a decrease in other payables of $6,134

Cash provided by financing activities for the nine months ended March 31, 2011 consisted of the sale of short term promissory notes, which provided $810,611 in cash, and from the sale of common stock of $32,500.

Cash used in financing activities for the nine month ended March 31, 2011 of the repayment on the line of credit of $5,630.

During the nine months ended March 31, 2010, cash provided by financing activities for the nine months ended March 31, 2010 consisted of the sale of short term promissory notes, which provided $1,225,550 in cash, and from our line of credit in the amount of $18,293.

Cash used in financing activities for the nine month ended March 31, 2010 consisted primarily of repayment of $225,279 to various promissory note holders.

$4,602 of cash was provided in foreign currency transactions related to exchange losses on convertible notes payable during the nine months ended March 31, 2011 and $149,980 of cash was used in foreign currency transactions for the nine months ended March 31, 2010.

As of March 31, 2011, we had cash and cash equivalents of $45,568, an increase of $26,149 from the balance at June 30, 2010, which was $19,419.

Our working capital deficit increased as of March 31, 2011 to $15,859,195 as compared to a working capital deficit of $10,630,231 at June 30, 2010 .

During the six months ended December 31, 2010, cash used in operating activities was $589,215 resulting from a gross profit of $432,004 and operating expenses of $2,044,145 .

This included non cash charges for depreciation, stock and option compensation, amortization of beneficial conversion feature and accretion of debt discount of $306,879, $631,542, $867,445 and $652,229, respectively.

Other operating activities that increased cash were a reduction in Inventory of $17,972, an increase in the cash overdraft of $29,550, an increase in accounts payable of $703,810, an increase in other accrued liabilities of $199,200 and an increase in accrued interest of $1,152,348.

Operating activities that decreased cash included an increase in accounts receivable of $834,575.

Cash provided by investing activities for the six months ended December 31, 2010 consisted of cash assumed on acquisition of $15,063.

Cash provided by financing activities for the six months ended December 31, 2010 consisted of the sale of short term promissory notes, which provided $602,000 in cash.

Cash used in financing activities for the six month ended December 31, 2010 consisted of payments of $4,277 to lines of credit.

$43,321 of cash was provided in foreign currency transactions related to exchange gains on convertible notes payable during the six months ended December 31, 2010 and $10,807 was used in the six months ending December 31 2009.

As of December 31, 2010, we had cash and cash equivalents of $86,311, an increase of $66,892 from the balance at June 30, 2010, which was $19,419.

Our working capital deficit increased as of December 31, 2010 to ($14,741,401) as compared to a working capital deficit of ($10,630,231) at June 30, 2010 .

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.

On November 26, 2010 we signed an Equity Line of Credit Agreement with Kodiak Capital, as amended and restated on January 21, 2011.

9 unchanged sentences

Average Closing Bid Price

Maximum available amount

Maximum Put Amount Available

The above table is based on historical performance and is intended purely to illustrate the amount of funds that we could have drawn from Kodiak had the Equity Finance Agreement been available during that period.

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Future performance cannot be guaranteed but on the basis that the share volumes continue in future periods in line with recent history we would have the ability to avail ourselves of the full $15 million available under the agreement.

As of March 31, 2011, we do not have sufficient authorized shares available to raise the full $15 million under the Kodiak financing agreement.

As of December 31, 2010, we do not have sufficient authorized shares available to raise the full $15 million under the Kodiak financing agreement.

In order to facilitate the full draw we will most likely have to increase our number of total authorized shares, requiring a shareholder vote, before we would have the ability to raise the full $15 million under the Kodiak financing agreement.

11 unchanged sentences

However, there is no assurance that any additional capital will be raised.

FORWARD LOOKING STATEMENTS

Certain statements contained in this report may constitute forward-looking statements.

We disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable to Smaller Reporting Companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 2. Management’s Discussion and Analysis