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ON4 COMMUNICATIONS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This quarterly report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. Except as required by applicable laws, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with our interim unaudited financial statements and the notes thereto that appear elsewhere in this quarterly report. All currency references in this quarterly report are to U.S. dollars unless otherwise noted. Business Overview We were incorporated as a Delaware company on June 4, 2001 under the name Sound Revolution Inc. On July 2, 2009 we changed our name to On4 Communications, Inc. Our fiscal year end is October 31. Our address is 16413 N. 91 Street, C 100, Scottsdale, AZ 85260. Our telephone number is (480) 619-5510. On March 12, 2009, we entered into a merger agreement with On4 Communications, Inc., a private Arizona company incorporated on June 5, 2006 ("On4"). We subsequently amended this agreement on April 7, 2009, and on May 1, 2009 we completed the merger with On4, with us as the surviving entity. Upon the completion of the merger, we had three wholly-owned subsidiaries: (i) Charity Tunes Inc., a Delaware company incorporated on June 27, 2005 for the purpose of operating a website for the distribution of music online ("Charity Tunes"); (ii) Sound Revolution Recordings Inc., a British Columbia, Canada company incorporated on June 20, 2001 for the purpose of carrying on music marketing services in British Columbia ("SRR"); and (iii) PetsMobility Inc., a Delaware company incorporated on March 23, 2006 for the purpose of operating the website www.petsmo.com and related business ("PetsMobility"). On April 29, 2010 we sold our interest in PetsMobility, excluding certain specific assets, to On4 Communications Inc., a private Canadian company and our shareholder ("On4 Canada") pursuant to an asset purchase agreement in exchange for On4 Canada returning 2,000,000 shares of our common stock to our treasury for cancellation. On October 29, 2010 we amended the asset purchase agreement to clarify certain terms of the purchase and sale. On March 16, 2011 we sold our interest in Charity Tunes and Sound Revolution Recordings Inc. to Empire Success, LLC, a private Nevada limited liability company ("Empire"), in exchange for $15,000 and 6,300 shares of Empire's common stock. As a result, we currently have no subsidiaries. We are a development stage company, providing wireless communications services to telecommunication companies, consumers and businesses. Our platform comprises global positioning system ("GPS") device management, location-based services ("LBS") capabilities, and the broadcasting of proprietary and non-proprietary content. LBS is a term used to describe the delivery of information and entertainment content to consumers with mobile devices based on the geographical position of the mobile device. We intend to deliver LBS via two-way communication tracking devices with applications that are able to track people, pets, assets and inventory. Our solution platform integrates various location-aware devises, such as GPS receivers, and transmits data to a range of devices, including Web browsers, instant messengers, short message service/mail, and mobile phones. 4--------------------------------------------------------------------------------Results of Operations Our results of operations are presented below: Accumulated from June 5, 2006 Three Months Three Months (Date of Ended Ended Six Months Ended Six Months Ended Inception) to April 30, April 30, April 30, April 30, April 30, 2011 2010 2011 2010 2011 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) ($) ($) ($) ($) ($) Revenue - - - - - Total Expenses 29,191 510,564 68,352 678,466 11,336,420 Net Income (Loss) 20,638 (694,774 ) (43,271 ) (946,635 ) (13,453,600 ) Three Months Ended April 30, 2011 and April 30, 2010, and the Period from June 5, 2006 (Date of Inception) to April 30, 2011 From our inception on June 5, 2006 to April 30, 2011, we did generate any revenue. Our total expenses during the three months ended April 30, 2011 were $29,191, compared to total expenses of $510,564 during the same period in fiscal 2010. Our total expenses from our inception on June 5, 2006 to April 30, 2011 were $11,336,420. Our total expenses during the three months ended April 30, 2011 consisted of $241 in amortization of property and equipment, $12,533 in foreign exchange loss, $7,403 in general and administrative expenses and $30,014 in professional fees, as offset by the recovery of $21,000 in consulting fees. During this period we also incurred $23,681 in other expenses, all of which were in the form of interest expenses. Our total expenses during the three months ended April 30, 2010 consisted of $3,759 in advertising and marketing expenses, $1,738 in amortization of intangible assets, $1,960 in amortization of property and equipment, $315,531 in consulting fees, $23,778 in foreign exchange loss, $41,438 in general and administrative expenses, $45,000 in management fees, $74,524 in professional fees and $2,836 in research and development expenses. During this period we also incurred $143,960 in other expenses, including $100,049 in interest expenses and $43,911 in loss on the settlement of debt. Our total expenses from our inception on June 5, 2006 to April 30, 2011 consisted of $182,182 in advertising and marketing expenses, $17,989 in amortization of intangible assets, $33,765 in amortization of property and equipment, $2,136,862 in consulting fees, $265,666 in foreign exchange loss, $1,070,754 in general and administrative expenses, $3,274,110 in impairment of goodwill, $2,219,724 in impairment of intangible assets, $1,162,596 in management fees, $3,566 in payroll expenses, $650,846 in professional fees and $318,360 in research and development expenses. Our general and administrative expenses consisted of travel, meals and entertainment, office maintenance, communication expenses (cellular, internet, fax and telephone), office supplies and courier and postage costs. Our professional fees consisted of legal, accounting and auditing fees. The decrease in our operating expenses during the three months ended April 30, 2011 was primarily due to decreases in our consulting fees, professional fees, management fees and general administrative expenses. During the three months ended April 30, 2011 we incurred a $53,052 loss from continuing operations, received a gain of $73,690 from discontinued operations and received net income of $20,538. During the same period in fiscal 2010 we incurred a $654,524 loss from continuing operations, incurred a $40,250 loss from discontinued operations and incurred a net loss of $694,774. We did not experience any net loss per share during the three months ended April 30, 2011, whereas we experienced a net loss per share from continuing operations of $0.01 during the same period in our prior fiscal year. From our inception on June 5, 2006 to April 30, 2011 we incurred a $12,247,818 loss from continuing operations, incurred a $1,205,782 loss from discontinued operations and incurred a net loss $13,453,600. 5--------------------------------------------------------------------------------Six Months Ended April 30, 2011 and April 30, 2010 Our total expenses during the six months ended April 30, 2011 were $68,352, compared to total expenses of $678,466 during the same period in fiscal 2010. Our total expenses during the six months ended April 30, 2011 consisted of $483 in amortization of property and equipment, $16,061 in foreign exchange loss, $15,501 in general and administrative expenses and $38,498 in professional fees, as offset by the recovery of $2,191 in consulting fees. During this period we also incurred $43,668 in other expenses, all of which was in the form of interest expenses. Our total expenses during the six months ended April 30, 2010 consisted of $5,648 in advertising and marketing expenses, $3,477 in amortization of intangible assets, $3,920 in amortization of property and equipment, $315,531 in consulting fees, $27,544 in foreign exchange loss, $68,361 in general and administrative expenses, $90,000 in management fees, $158,302 in professional fees and $5,683 in research and development expenses. During this period we also incurred $173,736 in other expenses, including $129,825 in interest expenses and $43,911 in loss on the settlement of debt. The decrease in our operating expenses during the six months ended April 30, 2011 was primarily due to decreases in our consulting fees, professional fees, management fees and general administrative expenses. During the six months ended April 30, 2011 we incurred a $112,020 loss from continuing operations, received a gain of $68,749 from discontinued operations and incurred a net loss of $43,271. During the same period in fiscal 2010 we incurred a $852,202 loss from continuing operations, incurred a $94,433 loss from discontinued operations and incurred a net loss of $946,635. We did not experience any net loss per share during the six months ended April 30, 2011, whereas we experienced a net loss per share from continuing operations of $0.01 during the same period in our prior fiscal year. Liquidity and Capital Resources As of April 30, 2011 we had $588 in cash, $2,198 in total assets, $1,595,675 in total liabilities and a working capital deficit of $1,595,087. As of January 31, 2011 we had an accumulated deficit of $13,537,072. During the six months ended April 30, 2011 we spent $21,970 on operating activities, compared to spending of $132,502 on operating activities during the same period in fiscal 2010. The decrease in our expenditures on operating activities during the six months ended April 30, 2011 was due to a number of changes in our operating assets and liabilities as well as adjustments to reconcile our net loss to net cash used in our operating activities. Notably, our accrued interest payable and amounts due to related parties decreased from $78,863 and $85,945 during the six months ended April 30, 2010, to $41,013 and $35,462 during the current period, respectively, while our accounts payable and accrued liabilities similarly decreased from $140,354 to $16,603. From our inception on June 5, 2006 to April 30, 2011 we spent $2,675,746 on operating activities. During the six months ended April 30, 2011 we did not spend any money on investing activities, whereas we spent $2,897 on investing activities during the same period in fiscal 2010. From our inception on June 5, 2006 to April 30, 2011 we spent $1,328,908 on investing activities, the bulk of which was in the form of advances for notes receivable of $1,114,182 and the acquisition of intangible assets of $182,687. During the six months ended April 30, 2011 we received $15,000 from financing activities, all of which was in the form of proceeds from the disposition of our former subsidiaries, whereas we received $116,592 from financing activities during the same period in fiscal 2010. The decrease in our receipts from financing activities during the six months ended April 30, 2011 was primarily due to decreases of $75,000 in proceeds from notes payable and $81,372 in proceeds from related parties, as offset by spending of $39,780 on repayments to related parties. From our inception on June 5, 2006 to April 30, 2011 we received $3,951,903 from financing activities, primarily in the form of proceeds from the issuance of our common stock and preferred stock. For the next 12 months (beginning July 2011), we estimate our planned expenses to be approximately $1,700,000, as summarized in the table below: Potential Estimated Description Completion Date Expenses ($) General and administrative expenses 12 months 250,000 Research and development 12 months 100,000 Sales and marketing 12 months 200,000 Professional fees 12 months 150,000 Unallocated working capital 12 months 100,000 Debt repayment 12 months 900,000 Total 1,700,000 Based on our planned expenditures, we require additional funds of approximately $1,700,000 to proceed with our business plan over the next 12 months. If we are not able to obtain additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations. 6 --------------------------------------------------------------------------------Future Financings We have not generated significant revenues since inception and are unlikely to generate significant revenues or earnings in the immediate or foreseeable future. We rely upon the sale of our securities and proceeds from related parties to fund our operations. We anticipate that we will incur substantial losses for the foreseeable future, and we are dependent upon obtaining outside financing to carry out our operations. We will require approximately $1,700,000 over the next 12 months to enable us to proceed with our plan of operations, including paying our ongoing expenses. These cash requirements are in excess of our current cash and working capital resources. Accordingly, we intend to raise funds from private placements, loans or possibly a registered public offering (either self-underwritten or through a broker-dealer). At this time we do not have a commitment from any broker-dealer to provide us with financing, and there is no guarantee that any financing will be available to us or if available, on terms that will be acceptable to us. If we are unable to obtain the necessary additional financing, then we plan to reduce the amounts that we spend on our operations, our professional fees and our general and administrative expenses so as not to exceed the amount of capital resources that are available to us. If we do not secure additional financing our current cash reserves and working capital will be not be sufficient to enable us to sustain our operations for the next 12 months, even if we do decide to scale them down. Going Concern Our financial statements for the six months ended April 30, 2011 have been prepared on a going concern basis and contain an additional explanatory paragraph in Note 1 which identifies issues that raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. Inflation The amounts presented in our financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments. Employees We do not currently have any employees, but we engage consultants to provide us with legal, accounting, management, marketing, sales and software development services. Critical Accounting Policies Our financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our financial statements for the six months ended April 30, 2011. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management. Foreign Currency Translation Our functional currency and our reporting currency is the United States dollar and foreign currency transactions are primarily undertaken in Canadian dollars. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Stock-Based Compensation We record stock-based compensation in accordance with ASC 718, Compensation - Stock Based Compensation, and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. 7-------------------------------------------------------------------------------- |