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VERECLOUD, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report on Form 10-K. Unless indicated otherwise, results of operations data in this MD&A are presented in accordance with United States generally accepted accounting principles ("GAAP"). OVERVIEW The Company is headquartered in Englewood, Colorado and is the developer and operator of Cloudwrangler™, a cloud service brokerage platform, which connects and integrates cloud service suppliers to SMBs through multiple distribution channels. 16 -------------------------------------------------------------------------------- For the past five years, Verecloud has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Verecloud has provided professional service solutions in areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others). For the periods covered by this Annual Report on Form 10-K, the Company's revenue stream consists solely of billable professional services. No software or product revenue has yet occurred. While professional services remained the Company's sole source of revenue as of the period covered by this Annual Report on Form 10-K, the Company has created Cloudwrangler™, a cloud service brokerage platform, which connects and integrates cloud service suppliers to SMBs through multiple distribution channels. Verecloud will distribute, manage and bill for cloud services to SMBs. Verecloud will reach these SMBs through targeted distribution channels including VARs, MSPs and CSPs, such as wireline and wireless telecommunications and cable companies. Verecloud's objective is to bridge the current gap between (i) small and medium businesses that want expanded and integrated services via the Cloud, (ii) CSPs and MSPs who need innovative, high-margin services to drive growth, and (iii) innovative clouding computing solution suppliers who want access to the large distribution channels that have developed. In addition and as a secondary revenue stream, the Company continues to explore opportunities with large CSPs who are looking to integrate Cloudwrangler™ into their internal systems. For these customers, the Company anticipates focusing on three streams of revenue. First, upfront integration fees charged to customers for integrating Cloudwrangler™ into their existing systems. Second, license and support fees for ongoing maintenance and support of the platform. Finally, transaction fees related to activity that travels through the Cloudwrangler™ platform. The success of this new strategy will depend on several major factors. First, Verecloud's ability to acquire additional funding to execute on the business which consists of: (i) continued development and upgrade of Cloudwrangler™; (ii) executing on the go-to-market strategy of directly marketing, selling and serving SMB customers; and (iii) successfully proving the business model in the marketplace and driving customer growth in the next 12 months. The Company has rolled out its service and is selling cloud services directly to the SMB market.. As of the date of this report, the Company had approximately 15 SMB customers. As a result, the Company does not expect to generate significant revenue until early 2012 and expects to operate at a loss until that time. The Company is aggressively moving forward on executing on their strategy and concurrently, is actively engaged in discussions to secure long term funding of $5-10 million by January 2012. If long term funding is not received by January 2012, the Company will either have to obtain additional short term funding or will be required to significantly curtail operations to continue as a going concern. Going Concern Our financial statements have been prepared on the basis of accounting principles applicable to a going concern. However, at June 30, 2011, we had negative working capital and a stockholders' deficit and require additional funding to execute on our business plan. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital and implement our business plan. Based on our current business plan and projections, we will need approximately $5 million to meet our cash requirements for the next twelve months. This plan is the basis of discussion with potential investors and strategic partners. Of this amount, approximately $1 million will be used for ongoing Cloudwrangler™ development and product enhancements, approximately $2 million for sales and marketing and approximately $2 million is needed for general working capital and administrative expenses. We are exploring funding options that include debt financing, equity investments and strategic alliances. Our current lender, TMG Colorado, is providing interim funding through our existing loan agreement on a month to month basis, as amended (See Note 7 to our financial statements for additional information). TMG Colorado has funded operations through September 2011 and has indicated a willingness to fund operations in the short term. However, no assurances can made that TMG Colorado will continue to fund the company in the short term. As of September 28, 2011, we have not secured any additional financing or commitments Assurances cannot be given that adequate financing can be obtained to meet our capital needs. If we are unable to generate profits and are unable to obtain financing to meet our working capital requirements, we may have to curtail our business sharply or cease operations altogether. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis to retain our current financing, to obtain additional financing, and, ultimately, to attain profitability. Should any of these events not occur, we will be adversely affected and we may have to cease operations. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on financial performance, results of operations and stock price and require it to curtail or cease operations, sell off its assets, seek protection from its creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of the Company's common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that the Company relinquish valuable rights. Management believes that actions presently being taken to raise funds provide the opportunity for the Company to continue as a going concern. As of September 28, 2011, our current cash balance will fund us into October 2011. Our fiscal year 2012 plan does not contemplate significant revenue from Cloudwrangler™ until at least the third quarter of fiscal year 2012. With significant revenue not planned until the second half of fiscal year 2012, as noted above, we will need an additional $5 million to fund operations through fiscal year 2012. The Company currently does not have enough cash to operate for the next 12 months without this additional capital. Outlook Verecloud's mission is to simplify the cloud for SMBs. The wide variety of services, the staggering number of new offerings, security considerations and the cost and integration challenges impede customer adoption. Verecloud solves these problems, while creating a new effective channel for service providers. Verecloud is a value added reseller of high demand cloud services targeted at the SMB market. The "value add" is a unique solution that allows SMBs to aggregate, order and integrate all their cloud services through a single portal. 17 -------------------------------------------------------------------------------- Revenue While professional services remained the Company's sole source of revenue as of the period covered by this Annual Report on Form 10-K, the Company has created Cloudwrangler™, a cloud service brokerage platform, which connects and integrates cloud service suppliers to small and medium size businesses ("SMBs") through multiple distribution channels. Verecloud will distribute, manage and bill for cloud services to SMBs. Verecloud will reach these SMBs through targeted distribution channels including VARs, MSPs and CSPs, such as wireline and wireless telecommunications and cable companies. Verecloud's objective is to bridge the current gap between (i) small and medium businesses that want expanded and integrated services via the Cloud, (ii) CSPs and MSPs who need innovative, high-margin services to drive growth, and (iii) innovative clouding computing solution suppliers who want access to the large distribution channels that have developed. In addition and as a secondary revenue stream, the Company continues to explore opportunities with large CSPs who are looking to integrate Cloudwrangler™ into their internal systems. For these customers, the Company anticipates focusing on three streams of revenue. First, upfront integration fees charged to customers for integrating Cloudwrangler™ into their existing systems. Second, license and support fees for ongoing maintenance and support of the platform. Finally, transaction fees related to activity that travels through the Cloudwrangler™ platform. As our revenues increase, we plan to continue to invest in marketing and sales, in addition to research and development, by increasing our presence within the industry and well as continued targeted sales efforts within and outside the telecommunications industry. Cost of Goods Sold As we expand our go-to-market strategy and grow our customers, products and services, our cost of sales will consist primarily of the direct costs associated with our product catalog and the reseller terms and conditions therein. We expect our gross margins on these products and services to be in the 20-25% range as we gain scale and efficiencies with each added customer. Operating Expenses With the expected growth in revenue, customer acquisition, customer support and general and administrative expenses are expected to increase. We expect to continue to add supporting staff in sales and marketing, customer support and accounting as we grow the business. Historical Information Historical performance should not be viewed as indicative of future performance, as there can be no assurance that operating income or net earnings will be sustained at these levels. For a discussion of factors affecting operating results, see the Risk Factors section above. Results of Operations The following table sets forth the results of our operations for the periods indicated as a percentage of revenues: Year ended June 30, 2011 2010 % of % of Amount Revenues Amount Revenues in dollars except percentages Revenue $ 4,424,608 100 % $ 5,840,706 100 % Cost of goods sold (1) 2,313,632 52 % 2,621,577 45 % Gross profit 2,110,976 48 % 3,219,129 55 % Operating expenses 8,067,024 182 % 4,076,704 70 % Operating income (loss) (5,956,048 ) -135 % (857,575 ) -15 % Other income (expense) (126,707 ) -3 % (122,823 ) -2 % Income tax expense (benefit) 13,140 0 % (579,905 ) -10 % Net income (loss) $ (6,095,895 ) -138 % $ (400,493 ) -7 % (1) Includes software amortization of $236,608 18 -------------------------------------------------------------------------------- Revenue: Revenue for the year ended June 30, 2011 decreased 24% compared to the year end June 30, 2010. This decline in revenue was driven by lower revenue from professional service engagements, primarily at LightSquared. In the second half of fiscal year 2011, our revenue from LightSquared declined from a quarterly amount of $1,002,326 in the three months ended March 31, 2011 to $230,298 in the three months ended June 30, 2011. As of September 28, 2011, our business focus has shifted to the SMB market and we no longer have any billable staff at LightSquared. All of our revenue for the years ended June 30, 2011 and 2010 was related to professional services engagements. Cost of Goods Sold: Cost of goods sold, which consists mainly of wage related expenses and travel expenses associated with our professional service engagements, decreased 21% in the year ended June 30, 2011 versus the same period in fiscal year 2010. This decline is consistent with the year over year revenue decline noted above. Cost of goods sold for the year ended June 30, 2011 also includes $236,608 associated with amortization of capitalized software costs. Gross Profit: Our gross profit as a percentage of revenue decreased from 55% in 2010 to 53% in 2011, mainly driven by slightly lower billable rates on our professional service engagements. Operating Expenses: Operating expenses for the year ended June 30, 2011 were up 98%, or $3,990,320 versus the comparable period in 2010. Excluding stock based compensation expense, operating expenses were up 1% or $21,842. The key changes include: · Stock based compensation expense was $4,337,178 in 2011 versus $368,700 in 2010 for an increase of $3,968,478. The main reasons for the increase were the $1,201,260 of expense in 2011 associated with the termination of the Unit Bonus Plan and issuance of common stock purchase warrants described in Note 11 to the financial statements with a calculated value under generally accepted accounting principles of $2,827,928. · Excluding stock based compensation expense, our employee related and consulting costs increased $537,755 in 2011 mainly due to the increase in consulting activities associated with sales and marketing activity in 2011. · Our legal and accounting expenses decreased $237,014 in 2011 mainly due to the high costs incurred in 2010 associated with (i) the completion of the Share Exchange and (ii) expansion of the stock ownership and compensation plans of the Company. Other Income (Expense): Other income (expense) for the year ended June 30, 2011 was ($126,707), consisting primarily of interest expense on the outstanding debt offset by interest income of $242. For the comparable period in 2010, interest income was $3,704 and interest expense was $126,527. The increase in interest expense is due to the higher outstanding debt balance in the current fiscal year versus 2010. Income Tax Expense (Benefit): For the current year, our only tax expense relates to small amounts due upon filing our tax return for fiscal year end June 30, 2010. For the year ended June 30, 2010, we recorded an income tax benefit of $579,905. This is driven by the tax benefit on the operating losses incurred after completion of the Share Exchange on August 31, 2009. As a result of the Share Exchange, the Company became subject to corporate U.S. federal, state and local taxes beginning in September 2009. Prior to August 31, 2009, Network Cadence was a pass-through entity for U.S. federal income tax purposes and U.S. federal, state, and local income taxes were not provided for this entity as it was not a taxable entity. Net Income (Loss): For the year ended June 30, 2011, we reported a net loss of $6,095,895, compared to a net loss of $400,493 for the year ended June 30, 2010. Excluding stock based compensation expense, the net loss was $1,758,717. The increase in net loss is driven by lower revenue and gross margin this year along with an increase of $3,968,478 in stock based compensation expense in the current year. Impact of Inflation Historically, inflation has not had a material effect on us. Liquidity and Capital Resources Year ended June 30, 2011 2010 Net cash from (used in) operating activities $ (746,597 ) $ 453,703 Investing Activities (857,214 ) (408 ) Financing Activities 1,608,917 (796,623 ) Net (decrease) in cash and cash equivalents $ 5,106 $ (343,326 ) Cash and cash equivalents at the beginning of the period 197,151 540,479 Cash and cash equivalents at the end of the period $ 202,256 $ 197,151 19 -------------------------------------------------------------------------------- Cash and cash equivalents at June 30, 2011 were $202,256, up from $197,151 as of June 30, 2010. As of June 30, 2011, total current assets were $392,843, which consisted of $202,256 of cash, $128,050 of accounts receivable, and $62,537 of other current assets. As of June 30, 2011, we had a negative working capital balance of $2,777,662, consisting of current assets of $392,843 and current liabilities of $3,170,505. This decline of $3,147,221 from June 30, 2010 is primarily driven by the classification of the outstanding debt to TMG as current since the principal balance is due on June 30, 2012. In the prior year, all outstanding debt was classified as long term. Our current liabilities consist of $271,126 of accounts payable, $485,380 related to accrued vacation, accrued consulting fees and accrued interest and $2,414,000 related to the outstanding debt to TMG Colorado. Net cash used in operating activities during the year ended June 30, 2011 was $746,597, compared to net cash provided by operations of $453,703 during the year ended June 30, 2010, a decrease of $1,200,300. This decrease is driven by lower revenue and gross margin in the year ended June 30, 2011. Net cash used in investing activities, consisting primarily of capital expenditures, for the year ended June 30, 2011 was $857,214, compared to $408 for year ended June 30, 2010. This increase is driven by the increase in gross capitalized software of $851,445 during fiscal year 2011. The remaining increase is for general office and computer equipment. Net cash from financing activities for the year ended June 30, 2011 was $1,608,917, consisting of $1,550,000 drawn on the line of credit plus $58,917 associated with the exercise of stock options. The success of the Company's business plan will depend on several major factors. First, its ability to acquire additional funding to execute on the business which consists of: (i) continued development and upgrade of Cloudwrangler™; (ii) executing on the go-to-market strategy of directly marketing, selling and serving SMB customers; and (iii) successfully proving the business model in the marketplace and driving customer growth in the next 12 months. The Company has begun adding SMB customers and is targeting having approximately 1,000 customers by June 30, 2012. As a result, the Company does not expect to generate significant revenue until early 2012 and expects to operate at a loss until that time. The Company is aggressively moving forward on executing on their strategy and concurrently, is actively engaged in discussions to secure long term funding of at least $5 million by January 2012. Between now and January 2012, the Company expects to be funded through increases in the existing loan agreement with TMG Colorado. If long term funding is not received by January 2012, the Company will either have to obtain additional short term funding or will be required to significantly curtail operations to continue as a going concern. Significant Accounting Policies and Estimates Related Party Transactions The Company has not adopted formal policies and procedures for the review, approval or ratification of related party transactions with its executive officers, directors and significant stockholders. However, all material related party transactions for the periods covered by this report have been disclosed and such transactions have been approved by the board of directors. Future transactions will, on a going-forward basis, be subject to the review, approval or ratification of the board of directors, or an appropriate committee thereof. Related party transactions, in addition to those disclosed in other footnotes, are described below. On June 10, 2010, the Company entered into a consulting agreement (the "Consulting Agreement") with The Mesa Group, Inc. ("TMG"). On March 31, 2011, the Company amended the Consulting Agreement (the "Amended Consulting Agreement"). Under the Amended Consulting Agreement, the first payment of $62,000 is due and payable upon the earlier of: (i) thirty days following the date that the Company secures and closes upon long term financing in a principal amount not less than $3,000,000; or (ii) September 30, 2011. As of September 28, 2011, the Company is in negotiations with TMG to extend the due date of this first payment to January 1, 2012. The Company will then make 11 quarterly payments of $62,000 on the last day of every calendar quarter (December 31, March 31, June 30 and September 30) through the term of the Amended Consulting Agreement which ends on June 30, 2014. The total aggregate payments under the Amended Consulting Agreement remain at $744,000. As of June 30, 2011, the Company had accrued $208,320 associated with the consulting agreement. The Company currently has a loan agreement with TMG's affiliate, TMG Colorado, and another affiliate of TMG, TMG Holdings, LLC, is the Company's second largest stockholder. Critical Accounting Policies and Estimates Basis of Presentation The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to revenue recognition, capitalized software development costs, stock-based compensation, goodwill and intangible assets, valuation of investments and accounting for income taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. 20 -------------------------------------------------------------------------------- Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Network Cadence. For the years ended June 30, 2011 and 2010, there were no equity investments in companies over which Verecloud has the ability to exercise significant influence, but does not hold a controlling interest. Verecloud has eliminated all significant intercompany accounts and transactions. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Reclassifications Certain prior year financial statement amounts have been reclassified to conform to the current year presentation with no impact on previously reported net income. Cash and Cash Equivalents For purposes of balance sheet classification and the statements of cash flows, we consider cash in banks, deposits in transit, and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk We primarily sell our services to customers in the communications industry in the United States on an uncollateralized, open credit basis. For the years ended June 30, 2011, and 2010, one customer accounted for 92% and 83% of the revenue, respectively. Cash is maintained at financial institutions. The Federal Deposit Insurance Corporation ("FDIC") currently insures accounts at each institution for up to $250,000. At times, cash balances may exceed the FDIC insurance limit of $250,000. Accounts Receivable Accounts receivable include uncollateralized customer obligations due under normal trade terms and do not bear interest. Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on our regular assessment of the credit worthiness and financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country-specific risks and the financial condition of its distribution channels. At June 30, 2011, no allowance for doubtful accounts was necessary as the accounts receivable balance was received in full subsequent to June 30, 2011. Revenue Recognition For the periods covered by this Annual Report on Form 10-K, we derived our revenue solely from billable professional services provided to clients. Revenue is recognized only when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. Property and Equipment Equipment and furniture are carried at historical cost, net of accumulated depreciation. Depreciation is computed using straight-line methods over the estimated useful lives of the assets, ranging from three to seven years. Expenditures for repairs and maintenance which do not materially extend the useful lives of equipment and furniture are charged to operations. Fair Value Financial Instruments Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and accrued expenses. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand. 21 -------------------------------------------------------------------------------- Capitalized Software The Company accounts for the costs of software within its products in accordance with Accounting Standards Codification ("ASC") Topic 985-20 "Costs of Software to be Sold, Leased or Marketed", under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design, as specified by ASC Topic 985-20. Upon the general release of the product to customers, development costs for that product will be amortized over periods not exceeding one year. The Company began capitalizing software costs in September 2010. Amortization expense was $236,608 in fiscal year 2011. The unamortized balance of capitalized software was $614,837 at June 30, 2011. Capitalized interest was $23,917 for the year ended June 30, 2011. As of June 30, 2011, capitalized software consists of the following: June 30, 2011 Capitalized software $ 851,445 Loss accumulated amortization (236,608 ) Net capitalized software $ 614,837 With regard to the recoverability of capitalized software and development costs, we regularly perform an assessment of our ability to recover the costs invested in these assets. Our recoverability analysis considers projected future cash flows from the utilization of the underlying software in the respective components of the business. Our projections of future cash flows are affected by such factors as technological change, competitive offerings, marketplace expectations and project development. Changes in any of these factors may result in future write-downs of the carrying value of these or other assets. Research and Development Costs Costs related to research, design and development of products, which consist primarily of personnel, product design and infrastructure expenses, are expensed as they are incurred. For the years ended June 30, 2011 and 2010, the Company incurred research and development expenses of $454,824 and $897,668, respectively. Advertising Advertising and marketing costs are expensed when incurred. For the years ended June 30, 2011 and 2010, the Company incurred marketing expenses of $738,878 and $682,264, respectively. Segment Information Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. We currently operate in one business segment and will evaluate additional segment disclosure requirements if it expands operations. Significant Customers For the years ended June 30, 2011 and 2010, the Company had a substantial business relationship with one major customer, LightSquared. LightSquared accounted for 92% and 83% of the Company's total revenue for the years ended June 30, 2011 and 2010, respectively. The Company does not expect LightSquared to be a significant customer in fiscal year 2012. Long-Lived Assets We account for our long-lived assets in accordance with Accounting for the Impairment or Disposal of Long-Lived Assets ("ASC 360"). Our primary long-lived assets are property and equipment. ASC 360 requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Additionally, the standard requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date. For property and equipment, our assets consist primarily of computers and office equipment. We have compared the net book value of these assets to market-based pricing for similar used equipment. As of June 30, 2011, the depreciated value of the assets materially reflects the estimated fair value of similar used equipment in the marketplace. Stock Based Compensation Expense Stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. We estimate the fair value of stock options in accordance with ASC Topic 718 using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) expected volatility of the Company's common stock, which is based on the Company's peer group in the industry in which the Company does business; (ii) expected life of the option award, which is calculated using the "simplified" method provided in the SEC's Staff Accounting Bulletin No. 110 since the Company does not have sufficient historical option exercise experience with which to estimate expected term and takes into consideration the grant's contractual life and vesting periods; (iii) expected dividend yield, which is assumed to be 0%, as the Company has not paid and does not anticipate paying dividends on its common stock; and (iv) the risk-free interest, which is based on the U.S. Treasury yield curve in effect at the time of grant with maturities equal to the grant's expected life. In addition, ASC Topic 718 requires the Company to estimate the number of options that are expected to vest. In valuing stock based awards under ASC Topic 718, significant judgment is required in determining the expected volatility of the Company's common stock. 22 -------------------------------------------------------------------------------- Accounting for Income Taxes Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year's results and for deferred tax assets and liabilities related to the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Net Income (Loss) Per Common Share Basic earnings (loss) per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. Common equivalent shares are excluded in periods in which they are anti-dilutive. For the years ended June 30, 2011 and 2010, common equivalent shares totaling 19,185,622 and 3,919,151, respectively, were not included because their effect was anti-dilutive for the periods presented. Recent Pronouncements The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board ("FASB"), the SEC, and the Emerging Issues Task Force ("EITF"), to determine the impact of new pronouncements on GAAP and the impact on the Company. In October 2009, FASB published ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product's essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition . In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this did not have an impact on the Company's consolidated financial position, results of operations or cash flows. In January 2010, FASB published ASU 2010-06, Improving Disclosures about Fair Value Measurement, which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. The adoption of this did not have an impact on the Company's consolidated financial position, results of operations or cash flows. In April 2010, the FASB published ASU 2010-13 , Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company's adoption of ASU 2010-13 in the first quarter of fiscal year 2011 did not impact the Company's consolidated financial statements. In May 2011, the FASB issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards. This accounting standard update is effective for the Company beginning in the third quarter of fiscal 2012. The Company does not expect it will have a material impact on its consolidated financial statements. There were no other accounting standards and interpretations issued recently which are expected to have a material impact on the Company's financial position, operations or cash flows. Off-Balance Sheet Arrangements As of and subsequent to June 30, 2011, we have no off-balance sheet arrangements. |