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MDU COMMUNICATIONS INTERNATIONAL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The purpose of this discussion is to provide an understanding of the Company's
financial results and condition by focusing on changes in certain key measures
from year to year. Management's Discussion and Analysis is organized in the
following sections:
· Forward-Looking Statements
· Overview
· Summary of Results and Recent Events
· Critical Accounting Policies and Estimates
· Recently Adopted Accounting Pronouncements
· Results of Operations - Three Months Ended December 31, 2011 Compared to Three
Months Ended December 31, 2010
· Liquidity and Capital Resources - Three Months Ended December 31, 2011
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not historical in nature
are forward-looking within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements. In some cases, you can identify forward-looking
statements by our use of words such as "may," "will," "should," "could,"
"expect," "plan," "intend," "anticipate," "believe," "estimate,"
"potential" or "continue," or the negative, or other variations of these words,
or other comparable words or phrases. Factors that could cause or contribute to
such differences include, but are not limited to, the fact that we are dependent
on our program providers for satellite signals and programming, our ability to
successfully expand our sales force and marketing programs, changes in our
suppliers' or competitors' pricing policies, the risks that competition,
technological change or evolving customer preferences could adversely affect the
sale of our products, the integration and performance of acquisitions,
unexpected changes in regulatory requirements and other factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission, including, but not limited to our Annual Report on Form 10-K filed
on December 23, 2011 for the year ended September 30, 2011.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this report. You should not place
undue reliance on forward-looking statements.
In this discussion, the words "MDU Communications," "the Company," "we,"
"our," and "us" refer to MDU Communications International, Inc. together with
its subsidiaries, where appropriate.
OVERVIEW
MDU Communications International, Inc. is a national provider of digital
satellite television, high-speed Internet, digital voice and other information
and communication services to residents living in the United States
multi-dwelling unit ("MDU") market-estimated to include 26 million residences.
MDUs include apartment buildings, condominiums, gated communities, universities
and other properties having multiple units located within a defined area. The
Company negotiates long-term access agreements with the owners and managers of
MDU properties allowing it the right to design, install, own and operate the
infrastructure and systems required to provide digital satellite television,
high-speed Internet, digital voice, and potentially other services, to their
residents.
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MDU properties present unique technological, management and marketing challenges
to conventional providers of these services, as compared to single family homes.
The Company's proprietary delivery and design solutions and access agreements
differentiate it from other multi-family service providers through a unique
strategy of balancing the information and communication needs of today's MDU
residents with the technology concerns of property managers and owners and
providing the best overall service to both. To accomplish this objective, the
Company has partnered with DIRECTV, Inc. and has been working with large
property owners and real estate investment trusts (REITs) such as AvalonBay
Communities, Post Properties, Roseland Property Company, Related Companies, the
U.S. Army, as well as many others, to understand and meet the technology and
service needs of these groups.
The Company derives revenue through the sale of subscription services to owners
and residents of MDUs resulting in monthly annuity-like revenue streams. The
Company offers two types of satellite television service, Direct to Home ("DTH")
and Private Cable ("PC") programming. The DTH service uses a set-top digital
receiver for residents to receive state-of-the-art digital satellite and local
channel programming. For DTH, the Company primarily offers DIRECTV® programming
packages. From the DTH offerings the Company receives the following revenue,
(i) an upfront subscriber commission from DIRECTV for each new subscriber, (ii)
a percentage of the fees charged by DIRECTV to the subscriber each month for
programming, (iii) a per subscriber monthly fee billed to subscribers for
"protection plan" maintenance and services, and (iv) occasional other marketing
incentives or subsidies from DIRECTV. Secondly, the Company offers a Private
Cable video service where analog or digital satellite television programming can
be tailored to the needs of an individual MDU property and received through
normal cable-ready televisions. In Private Cable deployed properties, a bundle
of programming services is delivered to the resident's cable-ready television
without the requirement of a set-top digital receiver in the residence. Net
revenues from Private Cable result from the difference between the wholesale
prices charged by programming providers and the price charged by the Company to
subscribers for the private cable programming package. The Company provides DTH,
Private Cable, Internet services and digital voice on an individual subscriber
basis, but in many properties it provides these services in bulk (100% of the
units), directly to the property owner, resulting in one invoice and thus
minimizing churn, collection and bad debt exposure. These subscribers are
referred to in the Company's periodic filings as Bulk DTH or Bulk Choice
Advantage ("BCA") type subscribers in DIRECTV deployed properties or Bulk PC
type subscribers in Private Cable deployed properties. From subscribers to the
Internet service, the Company earns a monthly Internet access service fee.
Again, in many properties, this service is provided in bulk and is referred to
as Bulk ISP.
The Company's common stock trades under the symbol "MDTV" on the OTC Bulletin
Board. Its principal executive offices are located at 60-D Commerce Way, Totowa,
New Jersey 07512 and its telephone number is (973) 237-9499. The Company's
website is located at www.mduc.com.
SUMMARY OF RESULTS AND RECENT EVENTS
Total revenue for the quarter ended December 31, 2011 increased 3% over the same
period in fiscal 2010 from $6,724,728 to $6,948,297. Despite an increase in
revenue, EBITDA (as adjusted) declined for the quarter ended December 31, 2011
to $583,011, compared to EBITDA (as adjusted) for the quarter ended December 31,
2010 of $1,028,722. Approximately one-half of the EBITDA disparity is due to
significantly higher one-time installation and wiring service revenue generated
in the quarter ended December 30, 2010, which was contributed to in part by the
higher equipment subsidy DIRECTV offered in that quarter compared to the quarter
ended December 30, 2011. In addition, the decrease in EBITDA (as adjusted) was
negatively affected by (i) expansion of the Company's customer care and direct
sales capabilities by outsourcing certain call center functions, which resulted
in one-time set up and training charges and generated higher than normal
customer service and operating expense, (ii) operating costs associated with the
planned transfer of properties to the DIRECTV Connected Properties program and
other costs associated with the Company's participation in the DIRECTV Connected
Properties program as a dealer, and (iii) properties that the Company acquired
and transitioned in the third and fourth quarters of 2011 that are currently
producing a lower than average gross margin due to higher direct programming
costs, which the Company bears.
The Company's sales expense and general and administrative expense remained
constant, as a percent of revenue, for the quarter ended December 31, 2011
compared to the quarter ended December 31, 2010. Direct costs and customer
service and operating expenses, for the reasons mentioned above, increased 5%
and 2% as a percent of revenue, respectively, for the quarter ended December 31,
2011 compared to the quarter ended December 31, 2010. Depreciation and
amortization expense decreased 6%, as a percent of revenue, between the periods.
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The Company reports 76,284 subscribers to its services as of December 31, 2011,
a 3% decrease in its subscriber base from December 31, 2010 and 3% decrease from
the previous quarter ended September 30, 2011. A significant portion of the
decrease is due to the Company adjusting its subscriber base downward by
approximately 1,350 to reflect DIRECTV's recent recategorization of certain
delinquent and inactive pay subscribers to "terminated subscribers" status and
the non-renewal of certain private cable bulk properties that the Company chose
not to upgrade to digital services for economic reasons. In addition, the
Company has experienced a reduction in activations due to DIRECTV's tightening
of its customer credit policies for DTH choice and exclusive type subscribers.
During the quarter ended December 31, 2011, the Company had 24 properties and
7,016 units in work-in-process which will contribute to organic growth in the
upcoming quarters. The Company's breakdown of total subscribers by type and kind
as of December 31, 2011 is outlined below:
Subscribers Subscribers Subscribers Subscribers Subscribers
as of as of as of as of as of
Service Type Dec. 31, 2010 Mar. 31, 2011 June 30, 2011 Sept. 30, 2011 Dec. 31, 2011
Bulk DTH 16,489 16,943 20,328 20,272 20,491
Bulk BCA 10,418 10,621 10,403 9,880 9,880
DTH -Choice/Exclusive 21,323 21,246 22,577 22,541 20,527
Bulk Private Cable 15,166 13,174 13,125 13,125 12,188
Private Cable Choice/
Exclusive 4,081 3,665 2,669 2,351 2,782
Bulk ISP 5,508 5,887 5,887 5,576 5,363
ISP Choice or
Exclusive 5,534 5,356 4,818 4,966 5,034
Voice 26 22 18 14 19
Total Subscribers 78,545 76,914 79,825 78,725 76,284
The Company's average revenue per unit ("ARPU") at December 31, 2011 was $29.87,
almost identical to the year ended September 30, 2011 ARPU of $29.88. ARPU is
calculated by dividing average monthly revenues for the period (total revenues
during the period divided by the number of months in the period) by average
subscribers for the period. The average subscribers for the period is calculated
by adding the number of subscribers as of the beginning of the period and for
each quarter end in the current year or period and dividing by the sum of the
number of quarters in the period plus one. The Company believes that its
recurring revenue and ARPU will be positively impacted by (i) an increasing
DIRECTV ARPU (the average revenue generated by a DIRECTV subscriber was up 4.3%
in DIRECTV's third fiscal quarter to $88.98, as disclosed in DIRECTV's public
filings), (ii) an increasing ARPU generated from the sale of incremental
high-speed Internet services to the Company's subscribers, and (iii) a general
increase in recurring revenue realized from the upgrade of properties to the new
DIRECTV HD platform and the associated advanced services. DIRECTV currently
offers over 160 national HD programming channels - the most full time HD
channels of any provider. The continued launch and advertising campaign for the
new DIRECTV HD programming and associated services will continue to provide
visibility, incremental revenue and improved penetration rates within Company
properties.
The Company continued in the first quarter of 2012 a number of previously
announced initiatives designed to improve EBITDA (as adjusted) on a recurring
basis and reduce reliance on debt financing. In particular, the Company (i)
initiated additional price increases and introduced new pricing bundles for
video and broadband services, (ii) continued to roll out additional premium
priced broadband services and tiers to several other of its high-speed Internet
properties, (iii) negotiated further reductions/replacements for broadband
circuits and forged new business relationships, and (iv) continued to push its
"Customer Protection Plan" fee requiring annual pre-payment or monthly
auto-payment (eliminating time and costs and reducing bad debt exposure). These
initiatives, in addition to (i) the elimination of one time charges related to
the call center outsourcing, and (ii) actions to increase the margins in the
recently acquired properties, should return the Company to higher EBITDA (as
adjusted) levels.
The Company is focused on enhancing and expanding its broadband service offering
and has begun rolling out and marketing this service to its existing portfolio
of multi-family properties already signed to competitive and exclusive
agreements. Residents in select test property deployments will be offered
several pricing tiers with download speeds of up to 100Mbps. The costs
associated with deployment of broadband systems (that generally are delivered
over already existing Company-installed service distribution systems) have come
down in price over the years, as has the fixed recurring cost of bandwidth
supplied to the properties. By working with partners to further share and
allocate these lowered costs, the Company has made broadband deployments in
competitive and exclusive type properties a more profitable venture and one that
will result in more subscribers producing dual revenue streams. There is a
significant opportunity for the Company to now profitably up-sell broadband
services to potentially 68,000 of its existing subscribers that have already
made the decision to subscribe to the Company's video products.
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To support its growing video and broadband market in the South Central market,
the Company has recently launched a regional office in the Dallas / Fort Worth
area. The Company has grown from only a handful of properties in this regional
market three years ago to 147 properties with 9,370 subscribers in 34,263
residences at present. Providing a local presence in a large regional market not
only assists with sales and marketing initiatives (many multi-family owners and
subscribers prefer providers with a local presence), but it is more
cost-effective having Company technicians working out of and being coordinated
from a physical space than outsourcing the work to subcontractors and managing
them remotely.
On January 12, 2012, the Company received notice that DIRECTV was terminating
the previously disclosed October 11, 2011 MDU Referral and Right of Entry
Acquisition Agreement associated with the DIRECTV Connected Properties program.
The Company planned to participate in this program as a dealer obtaining new
rights of entry agreements for DIRECTV, and in reliance, the Company incurred
significant preparation costs, both monetary and opportunity. As a collateral
matter, the Company was in discussions with DIRECTV and had anticipated
transferring or selling a potentially significant portion of its choice
subscriber business to the Connected Properties program. In fact, in the quarter
ending March 31, 2012, the Company will be transferring five of its DTH Choice
type properties to the Connected Properties program for anticipated proceeds of
$256,000. However, at this point, it is uncertain as to whether future property
transfers will take place, although the parties remain in discussions. The
Company continues to maintain its Construction Contractor Agreement with
DIRECTV.
The Company continues negotiations with several companies that it deems
significant strategic acquisition/merger prospects. To assist the Company in
assessing its strategic plans, the Company has retained the investment advisory
firm of Berkery, Noyes & Co. The Company makes no representations that these
acquisition/merger and financing negotiations will result in any closed
transactions. The Company continues to assess its core and non-core service
areas and has identified certain assets in non-core markets that are being
considered for sale. To that end, the Company is engaged with several parties
regarding interest for the sale of these assets at prices similar to what the
Company has previously received. The Company makes no representations that these
sale negotiations will result in any closed transactions.
Use of Non-GAAP Financial Measures
The Company uses the performance gauge of EBITDA (as adjusted by the Company) to
evidence earnings exclusive of mainly noncash events, as is common in the
technology, and particularly the cable and telecommunications, industries.
EBITDA (as adjusted) is an important gauge because the Company, as well as
investors who follow this industry frequently, use it as a measure of financial
performance. The most comparable GAAP reference is simply the removal from the
Company's net income (or loss) of interest, depreciation, amortization and
noncash charges related to its shares, warrants and stock options. The Company
adjusts EBITDA by then adding back any provision for bad debts and inventory
reserves. EBITDA (as adjusted) is not, and should not be considered, an
alternative to income from operations, net income, net cash provided by
operating activities, or any other measure for determining our operating
performance or liquidity, as determined under accounting principles generally
accepted in the United States of America. EBITDA (as adjusted) also does not
necessarily indicate whether cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in our industry or the
economy generally. For the three months ended December 31, 2011 and 2010, the
Company reported EBITDA (as adjusted) of $583,011 and $1,028,722, respectively.
The following table reconciles the comparative EBITDA (as adjusted) of the
Company to its consolidated net loss as computed under accounting principles
generally accepted in the United States of America:
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For The Three Months Ended
December 31,
2011 2010
EBITDA (as adjusted) $ 583,011 $ 1,028,722
Interest expense (777,646) (638,258)
Deferred finance costs and debt discount amortization
(interest expense) (96,816) (84,315)
Provision for doubtful accounts (145,006) (135,177)
Depreciation and amortization (1,550,772) (1,865,272)
Share-based compensation expense - employees (15,347) (12,189)
Compensation expense for issuance of common stock
through Employee Stock Purchase Plan - (746)
Compensation expense for issuance of restricted common
stock for services rendered (34,864) -
Net Loss $ (2,037,440) $ (1,707,235)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these condensed consolidated
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Significant estimates
are used for, but not limited to, revenue recognition with respect to a new
subscriber activation subsidy, allowance for doubtful accounts, useful lives of
property and equipment, fair value of equity instruments and valuation of
deferred tax assets and long-lived assets. On an on-going basis, the Company
evaluates its estimates. Estimates are based on historical experience and on
other assumptions that are believed to be reasonable under the circumstances.
Accordingly, actual results could differ from these estimates under different
assumptions or conditions. During the three months ended December 31, 2011,
there were no material changes to accounting estimates or judgments.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In March 2011, accounting standards update on "Troubled Debt Restructuring" was
issued. The update clarifies which loan modifications constitute troubled debt
restructurings. It is intended to assist creditors in determining whether a
modification of the terms of a receivable meets the criteria to be considered a
troubled debt restructuring, both for purposes of recording an impairment loss
and for disclosure of troubled debt restructurings. In evaluating whether a
restructuring constitutes a troubled debt restructuring, a creditor must
separately conclude that both of the following exist, (a) the restructuring
constitutes a concession, and (b) the debtor is experiencing financial
difficulties. For public companies, the new guidance is effective for interim
and annual periods beginning on or after June 15, 2011. The Company evaluated
the effect that the adoption of this standard will have on its consolidated
results of operations, financial position and cash flows, and has determined the
adoption will have no material impact.
In April 2011, accounting standards update on "Reconsideration of Effective
Control for Repurchase Agreements" was issued. The amendments in this update
remove from the assessment of effective control, (a) the criterion requiring the
transferor to have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by the transferee,
and (b) the collateral maintenance implementation guidance related to that
criterion. The guidance should be applied prospectively to transactions or
modifications of existing transactions that occur on or after the effective
date. The guidance is effective for the first interim or annual period beginning
on or after December 15, 2011. The Company evaluated the effect that the
adoption of this standard will have on its consolidated results of operations,
financial position and cash flows, and has determined the adoption will have no
material impact.
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RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition of the
Company should be read in conjunction with the Company's Condensed Consolidated
Financial Statements included elsewhere in this quarterly report on Form 10-Q.
THREE MONTHS ENDED DECEMBER 31, 2011 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2010
The following table sets forth for the three months ended December 31, 2011 and
2010 the percentages which selected items in the Statements of Operations bear
to total revenue and dollar and percentage changes between the periods:
Three Months Three Months Change Change
Ended December 31, 2011 Ended December 31, 2010 ($) (%)
REVENUE $ 6,948,297 100% $ 6,724,728 100% $ 223,569 3%
Direct costs 3,436,801 49% 2,973,285 44% 463,516 16%
Sales expenses 391,658 5% 344,223 5% 47,435 14%Customer service and operating expenses 1,638,639 24% 1,479,372 22% 159,267 11%
General and administrative expenses
1,099,090 16% 1,063,673 16% 35,417 3%
Depreciation and amortization 1,550,772 22% 1,865,272 28% (314,500) -17%
Gain on sale of customers and property
and equipment (5,685) 0% (16,416) 0% 10,731 65%
OPERATING LOSS (1,162,978) -16% (984,681) -15% (178,297) 18%
Interest expense (874,462) -13% (722,554) -10% (151,908) 21%
NET LOSS $ (2,037,440) -29% $ (1,707,235) -25% $ (330,205) 19%
Revenue. Revenue for the three months ended December 31, 2011 increased 3% to
$6,948,297, compared to revenue of $6,724,728 for the three months ended
December 31, 2010. This increase in recurring revenue is mainly attributable to
price increases and a higher percentage of customers subscribing to advanced
services. The Company expects total revenue to increase during the remainder of
fiscal 2012. Revenue has been derived, as a percent, from the following sources:
Three Months Ended Three Months Ended
December 31, 2011 December 31, 2010Private cable programming revenue $ 812,384 12% $ 1,125,716 17%
DTH programming revenue and subsidy 4,845,784 70% 4,055,732 60%
Internet access fees 771,014 11% 834,736 12%
Installation fees, wiring and other revenue 519,115 7% 708,544 11%
Total Revenue $ 6,948,297 100% $ 6,724,728 100%
The Company expects DTH programming revenue to continue to increase due to a
larger anticipated subscriber base, an increase in revenue associated with DTH
advanced services, price increases, and the conversion of certain properties
from low average revenue private cable subscribers to DTH service subscribers.
The conversion of private cable properties to DTH explains the decrease in
private cable programming revenue, which the Company anticipates will continue
in 2012.
Direct Costs. Direct costs are comprised of programming costs, monthly
recurring broadband circuits and costs relating directly to installation
services. Direct costs increased to $3,436,801 for the three months ended
December 31, 2011, as compared to $2,973,285 for the three months ended December
31, 2010. Direct costs are linked to the type of subscribers the Company adds.
Choice and exclusive DTH DIRECTV subscribers have no associated programming cost
and therefore little to no direct cost, while DTH DISH subscribers, private
cable and broadband subscribers have associated programming and circuit costs
and therefore a higher direct cost. As a result of the recent acquisition of
ATTVS DISH subscribers (whereby the Company incurs the full programming cost),
direct costs increased over the quarter ended December 31, 2010. Direct costs
are expected to increase during fiscal 2012 as subscribers are added, however,
the Company expects that these costs will decrease as a percent of revenue
during the remainder of fiscal 2012 as lower direct cost subscribers are added
and broadband circuits continue to decrease in price and programming price
increases and higher priced tiered broadband services continue to be implemented
to increase revenue.
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Sales Expenses. Sales expenses were $391,658 for the three months endedDecember 31, 2011, compared to $344,223 for the three months ended December 31,
2010, with no change as a percent of revenue. The increase is primarily
associated with the increased activity in preparation for participation in the
DIRECTV Connected Properties program that terminated on January 12, 2011. During
the remainder of fiscal 2012, the Company expects these expenses to increase
slightly as sales and marketing efforts remain strictly focused and encompass
more broadband marketing, but should decline as a percent of revenue as
additional revenue is generated from new subscribers, with no corresponding
increase in sales and marketing resources.
Customer Service and Operating Expenses. Customer service and operating
expenses are comprised of expenses related to the Company's call center,
technical support, project management and general operations. Customer service
and operating expenses were $1,638,639 and $1,479,372 for the three months ended
December 31, 2011 and 2010, respectively. The expenses increased period over
period primarily in connection with one time expenses associated with the
outsourcing of the call center and increasing customer service quality. The
Company believes that once the initial training and one time expenses are
incurred, the impact on these expenses will be favorable. Customer service and
operating expenses are generally expected to increase in dollars in relative
proportion with any increase in billable subscribers or any further increase in
customer service quality levels, however, the Company anticipates these expenses
will continue to decrease slightly as a percent of revenue during the remainder
of fiscal 2012 as efficiencies and scale are further realized. A breakdown of
customer service and operating expenses is as follows:
Three Months Ended Three Months Ended
December 31, 2011 December 31, 2010
Call center expenses $ 641,267 39% $ 566,142 38%
General operation expenses 290,304 18% 232,875 16%Property system maintenance expenses 707,068 43% 680,355 46%
Total customer service and operation expense $ 1,638,639 100% $ 1,479,372 100%
Call center expenses are closely proportional to the number of subscribers the
Company adds during any given period, but may increase disproportionally due to
an increase in service levels or utilization of the call center for other
objectives such as direct marketing. General operations expenses increased due
to additional personnel. Property system maintenance is generally proportional
to the number of properties the Company services (not necessarily the number of
subscribers), so the increase between the periods was due to an increased number
of actual properties (mainly the acquisition of ATTVS DISH properties) between
the periods.
Additionally, the Company wrote-off obsolete fixed assets during the three
months ended December 31, 2011 in the amount of $2,749, which is reported in
customer service and operating expenses.
General and Administrative Expenses. General and administrative expenses for
the three months ended December 31, 2011 and 2010, of $1,099,090 and $1,063,673,
respectively, stayed constant as a percent of revenue. Of the general and
administrative expenses for the three months ended December 31, 2011 and 2010,
the Company had total noncash charges included of $195,217 and $148,112,
respectively.
Excluding the $195,217 and $148,112 in noncash charges from the three months
ended December 31, 2011 and 2010, respectively, general and administrative
expenses were $903,873 (13% of revenue) compared to $915,561 (14% of revenue),
respectively. General and administrative expenses are fairly fixed and,
therefore, the Company expects these expenses to remain fairly constant, but
continue to decline as a percent of revenue.
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The Company recognized noncash share-based compensation expense for employees
based upon the fair value at the grant dates for awards to employees for the
three months ended December 31, 2011 and 2010, amortized over the requisite
vesting period, of $15,347 and $12,819, respectively. The total share-based
compensation expense not yet recognized and expected to vest over the next 22
months is approximately $79,000.
Other Noncash Charges. Depreciation and amortization expenses decreased from
$1,865,272 for the three months ended December 31, 2010, to $1,550,772 for the
three months ended December 31, 2011. The decrease is indicative of large
capital expenditures in prior periods becoming fully depreciated. Interest
expense included noncash charges of $96,816 for the amortization of deferred
finance costs and debt discount.
Net Loss. Primarily as a result of the above, and total noncash charges of
$1,842,805, the Company reported a net loss of $2,037,440 for the three months
ended December 31, 2011, compared to noncash charges of $2,097,699 and a
reported net loss of $1,707,235 for the three months ended December 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 2011 and 2010, the Company recorded
net losses of $2,037,440 and $1,707,235, respectively. Company operations used
net cash of $298,163 and had positive cash flow from operations of $1,277,422
during the three months ended December 31, 2011 and 2010, respectively. However,
the cause for higher positive cash flow from operating activities for the three
months ended December 31, 2010 was primarily a result of an increase in accounts
payable and accrued liabilities $524,557, compared to a decrease in accounts
payable and accrued liabilities of $546,776 during the three months ended
December 31, 2011. At December 31, 2011, the Company had an accumulated deficit
of $70,345,554.
On September 11, 2006, the Company entered into a Loan and Security Agreement
with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior
secured $20 million non-amortizing revolving five-year credit facility ("Credit
Facility") to fund the Company's subscriber growth. On June 30, 2008, the
Company entered into an Amended and Restated Loan and Security Agreement with
the same parties for a $10 million increase to the Credit Facility and a new
five-year term.
The Credit Facility requires interest payable monthly only on the principal
outstanding and is specially tailored to the Company's needs by being divided
into six $5 million increments. The Company is under no obligation to draw an
entire increment at one time. The first $5 million increment carries an interest
rate of prime plus 4.1%, the second $5 million at prime plus 3%, the third $5
million at prime plus 2%, the fourth $5 million at prime plus 1%, and the new
$10 million in additional Credit Facility is also divided into two $5 million
increments with the interest rate on these increments being prime plus 1% to 4%,
depending on the Company's ratio of EBITDA to the total outstanding loan
balance. As defined in the Credit Facility, "EBITDA" shall mean the Company's
net income (excluding extraordinary gains and non-cash charges) before
provisions for interest expense, taxes, depreciation and amortization. As
defined in the Credit Facility, "prime" shall be a minimum of 7.75%.
The Company borrowed $1,170,286 on its Credit Facility for the three months
ended December 31, 2011, and as of that date, the Company has borrowed a total
of $28,386,252 (not including debt discount of $66,436), which is due on June
30, 2013. As of December 31, 2011, $1,613,748 remains available for borrowing
under the Credit Facility.
The Credit Facility is secured by the Company's cash and temporary investments,
accounts receivable, inventory, access agreements and certain property, plant
and equipment. The Credit Facility contains covenants limiting the Company's
ability to, without the prior written consent of FCC, LLC, d/b/a First Capital,
and Full Circle Funding, LP, among other things:
· incur other indebtedness;
· incur other liens;
· undergo any fundamental changes;
· engage in transactions with affiliates;
· issue certain equity, grant dividends or repurchase shares;
· change our fiscal periods;
· enter into mergers or consolidations;
21
· sell assets; and
· prepay other debt.
The Credit Facility also includes certain events of default, including
nonpayment of obligations, bankruptcy and change of control. Borrowings will
generally be available subject to a borrowing base and to the accuracy of all
representations and warranties, including the absence of a material adverse
change and the absence of any default or event of default.
The Company did not incur or record a provision for income taxes for the three
months ended December 31, 2011 and 2010 due to the net loss. The net operating
loss carry forward expires on various dates through 2031, therefore, the Company
should not incur cash needs for income taxes for the foreseeable future.
The Company believes, but cannot assure, that the combination of revenues,
expected revenue increases, and the remaining available balance under the Credit
Facility will provide it with the needed capital to maintain operations through
December 31, 2012. Should the Company begin to accelerate subscriber growth, it
may have to sell assets or find alternative sources of capital funding.
THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010
During the three months ended December 31, 2011 and 2010, the Company recorded
net losses of $2,037,440 and $1,707,237, respectively. At December 31, 2011, the
Company had an accumulated deficit of $70,345,554.
Cash Balance. At December 31, 2011, the Company had cash and cash equivalents
of $327,442, compared to $84,747 at September 30, 2011. The Company maintains
little cash, as revenues are deposited against the balance of the Credit
Facility to reduce interest cost. During the three months ended December 31,
2011, the Company increased the amount borrowed against the Credit Facility by
$1,170,286. As of December 31, 2011, the Company believes, but cannot assure,
that the combination of cash, revenues, expected revenue growth and the
remaining available balance under the Credit Facility, will provide it with the
needed funds to maintain operations at least through December 31, 2012.
Operating Activities. Company operations used net cash of $298,163 during the
three months ended December 31, 2011, and provided net cash of $1,277,422 during
the three months ended December 31, 2010. Net cash (used in) provided by
operating activities included a decrease of $546,776 and an increase of $524,557
in accounts payable and other accrued liabilities during the three months ended
December 31, 2011 and 2010, respectively. Additionally, during the three months
ended December 31, 2011 and 2010 there was a decrease of $86,143 and an increase
of $274,610 in accounts and other receivables, respectively, and prepaid
expenses decreased $379,165 and $113,654, respectively. During the three months
ended December 31, 2011 and 2010, deferred revenue decreased $19,124 and
increased $532,853, respectively.
Net loss for the three months ended December 31, 2011 and 2010 was $2,037,440
and $1,707,235, respectively, inclusive of net noncash charges associated
primarily with depreciation and amortization and stock options and warrants of
$1,842,805 and $2,097,699, respectively.
Investing Activities. During the three months ended December 31, 2011 and 2010,
the Company purchased $609,404 and $1,066,609, respectively, of equipment
relating to subscriber additions and HD upgrades for the periods and for future
periods. During the three months ended December 31, 2011 and 2010, the Company
paid $0 and $321,130 respectively, for the acquisition of intangible assets and
related fees. During the three months ended December 31, 2011 and 2010, the
Company received $29,976 in proceeds for the sale of subscribers and related
property and equipment to DIRECTV as part of the Connected Properties program
and $45,651 in proceeds for the sale of subscribers and related property and
equipment to Comcast, respectively.
Financing Activities. During the three months ended December 31, 2011 and 2010,
the Company incurred $50,000 in deferred financing costs in each period, and
increased by $1,170,286 and decreased by $107,875, the amount borrowed (paid)
through the Credit Facility, respectively. Equity financing activity provided
$4,475 from 1,865 shares of common stock purchased by employees through the
Employee Stock Purchase Plan during the quarter ended December 31, 2010, with $0
during the quarter ended December 31, 2011.
22
Working Capital. As at December 31, 2011, the Company had negative working
capital of approximately $1,900,850, compared to negative working capital of
approximately $2,089,623 as at September 30, 2011. To minimize the draw on the
Credit Facility and the liability, the Company expects to have negative working
capital in fiscal 2012. The Company believes, but cannot assure, that it will
have sufficient funds to meet current operating activity obligations through
current revenue levels, expected revenue growth, cost cutting, and the funds
available through the Credit Facility, to maintain operations through December
31, 2012.
Capital Commitments and Contingencies. The Company has access agreements with
the owners of multiple dwelling unit properties to supply digital satellite
programming and Internet systems and services to the residents of those
properties, however, the Company has no obligation to build out those properties
and no penalties will accrue if it elects not to do so.
Future Capital Requirements. The Company believes, but can not assure, that it
has sufficient liquidity to fund operating expenses through December 31, 2012
and beyond. To fund future organic growth and acquisitions, the Company has been
and will continue to (i) pursue opportunities to raise additional financing
through private placements of both equity and debt securities, (ii) accelerate
deployments and growth through DIRECTV and other programs or products that do
not require significant capital outlay, and/or (iii) pursue negotiations with
certain entities for the sale of Company non-core assets. There is no assurance
that the Company will be successful in any financing or any of the other above
directives.
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