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IMMEDIATEK INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview The following Management's Discussion and Analysis, or MD&A, is intended to aid the reader in understanding us, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes accompanying those financial statements, which are included in this Quarterly Report on Form 10-Q. MD&A includes the following sections: · Our Business - a general description of our business, our objectives, our areas of focus and the challenges and risks of our business. · Critical Accounting Policies and Estimates - a discussion of accounting policies that require critical judgments and estimates. · Operations Review - an analysis of our consolidated results of operations for the periods presented in this Quarterly Report on Form 10-Q. · Liquidity, Capital Resources and Financial Position - an analysis of our cash flows and debt and contractual obligations; and an overview of our financial condition. Our Business General Immediatek is a Nevada corporation. Our principal executive offices are located at 3301 Airport Freeway, Suite 200, Bedford, Texas 76021, and our telephone number is (888) 661-6565. On April 1, 2010, Immediatek acquired Officeware by merger. As a result of such merger, Immediatek became the sole shareholder of Officeware and Officeware shareholders received 12,264,256 shares of Immediatek common stock for all of the outstanding shares of stock of Officeware. Radical Investments LP, an affiliate of Radical Holdings LP, owned 24.6% of the Officeware common stock. Radical Holdings LP owns the Company's Series A and Series B preferred stock. In addition, in connection with the merger Immediatek issued and sold, and Radical Holdings LP, Darin Divinia, Dawn Divinia, Robert Hart, Kimberly Hart and Martin Woodall collectively purchased, 3,066,064 shares of Immediatek common stock for an aggregate purchase price of $1.0 million, or approximately $0.33 per share. Due to the merger, it was determined that the Company ceased to be in the development stage as of April 1, 2010. Currently, the Company primarily operates in one business segment: e-commerce. Our services and products are primarily offered through Officeware. Officeware provides online back-up, file storage and other web-based services for individuals, businesses and governmental organizations. Officeware offers three primary services. First, Officeware operates the website FilesAnywhere.com, primarily designed for individuals and small businesses to allow them to establish a self-service account, enabling them to, among other things, store files on Officeware servers, share and collaborate on documents with other people online, and backup their computers to FilesAnywhere cloud storage. Second, for larger business users, Officeware offers three customized products, called the FilesAnywhere Private Site, Dedicated Server, and Enterprise Server. These corporate offerings are designed to meet the specific requirements of each business customer or organization. The Private Site, Dedicated Server, and Enterprise Server products provide flexible cloud storage and unlimited scalability for users, groups and internet applications, along with client-specific branding and web interfaces, customer data interfaces, and tailored security for mixed corporate environments. Third, Officeware also provides specialized information technology services related to the development of web based databases and data storage on a contract basis for clients. Officeware's operations are primarily based in Bedford, Texas and additionally, Officeware has one employee and several consultants performing research and development in India. 8-------------------------------------------------------------------------------- Table of Contents As a result of services provided to larger business users, our business can depend on one or a few major customers which could potentially expose the Company to concentration of credit risk. Our revenue and receivables are comprised principally of amounts due from customers throughout the United States. History of Operating Losses The following tables present our net loss and cash provided by or used in operating activities for the periods indicated. For the Three Months Ended March 31, 2012 2011 (unaudited) (unaudited) Net loss $ (291,863 ) $ (79,894 ) Net cash provided by operating activities $ 103,785 $ 130,448 Our existence and operations are dependent upon our ability to generate sufficient funds from operations to fund operating activities. We funded our operations during the three months ended March 31, 2012, primarily from the income generated by Officeware and the sale of 3,066,064 shares of Company common stock for an aggregate purchase price of $1.0 million on April 1, 2010. Management estimates that the Company will generate sufficient funds from operations to fund future operating activities, though the Company anticipates that any funds generated would be reinvested into the Company through our increased investment in marketing, services and sales operations, and research and development. Our Objectives and Areas of Focus Officeware - Increase Users. We are focused on increasing the number of users of the various online back-up, file storage and other web-based services for individuals, businesses and governmental organizations offered through Officeware. We may pursue aggressive advertising campaigns or other promotions primarily aimed at new users. Additionally, we are focusing on efficiently integrating the Officeware business with our business. Acquisitions. In addition to the Officeware acquisition which was consummated on April 1, 2010, we may identify and pursue additional potential acquisition candidates to support our strategy of growing and diversifying our business through selective acquisitions. No assurances can be given, however, that we will be successful in identifying any potential targets and, when identified, consummating their acquisition. Challenges and Risks Operating in this area provides unique opportunities; however, challenges and risks accompany those opportunities. Our management has identified the following material challenges and risks that will require substantive attention from our management (see "Liquidity and Capital Resources and Financial Position-Liquidity" beginning on page 12). Utilizing Funds on Hand in a Manner that is Accretive. If we do not manage our assets aggressively and apply available capital judiciously, we may not generate sufficient cash from our operating activities to fund our operations going forward, which would require us to seek additional funding in the future. Growing Users. In order to be successful with the products and services offered through Officeware, we will be required to attract new customers and deepen the current customer relationships which we currently have. Our largest clients require customized solutions, which in turn requires us to anticipate their needs. 9-------------------------------------------------------------------------------- Table of Contents Competition. There are companies in this industry that have far more financial resources and a larger market share than us. In order to compete with these companies, we will be required to be innovative and create more attractive functions and features. Additionally, see "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the SEC on March 30, 2012. Challenges and risks, including those described above, if not properly addressed or managed, may have a material adverse effect on our business. Our management, however, is endeavoring to properly manage and address these challenges and risks. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP in the United States of America, which requires management to make estimates, judgments and assumptions with respect to the amounts reported in the condensed consolidated financial statements and in the notes accompanying those financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, however, have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. We believe that the most critical accounting policies and estimates relate to the following: · Convertible Securities. From time to time, we have issued, and in the future may issue, convertible securities with beneficial conversion features. We account for these convertible securities in accordance with ASC Topic 470, Beneficial Conversion Feature. · Revenue Recognition. Officeware generates revenue primarily from monthly fees for the services and products that it offers. While revenues for Officeware's FilesAnywhere.com product are often received in advance of providing the applicable service, the Company defers recognizing such revenues until the service has been performed. Revenues for Officeware's custom products for large enterprises are often received after such services are provided. The Company recognizes such revenues when service has been provided and collection is reasonably assured. While our estimates and assumptions are based upon our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from those estimates and assumptions. Recent Accounting Standards and Pronouncements In September 2011 the Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for impairment. This ASU's objective is to simplify the process of performing impairment testing for Goodwill. With this update a company is allowed to assess qualitative factors, first, to determine if it is more likely than not (greater than 50%) that the FV is less than the carrying amount. This would be done, prior to performing the two-step goodwill impairment testing, as prescribed by Topic 350. Prior to this ASU, all entities were required to test, annually, their good will for impairment by Step 1 - comparing the FV to the carrying amount, and if impaired, then step 2 - calculate and recognize the impairment. Therefore, the fair value measurement is not required, until the "more likely than not" reasonableness test is concluded. Effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. 10-------------------------------------------------------------------------------- Table of Contents Operations Review The Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011 For the Three Months Ended March 31, 2012 vs. 2011 2012 2011 $ Change % Change Revenues $ 772,341 $ 730,616 $ 41,725 6 % Cost of revenues (275,329 ) (226,484 ) (48,845 ) 22 % Gross margin 497,012 504,132 (7,120 ) (1 )% Expenses: Research and development 255,246 198,095 57,151 29 % Sales and marketing 144,020 79,942 64,078 80 % General and administrative 251,442 212,247 39,195 18 % Non-cash consulting expense-related party 50,500 10,500 40,000 381 % Depreciation and amortization 83,602 79,972 3,630 5 % Total expenses 784,810 580,756 204,054 35 % Net operating loss (287,798 ) (76,624 ) (211,174 ) 276 % Other income (expense): Interest income 731 457 274 60 % Interest expense (296 ) (1,156 ) 860 (74 )% Income tax expense 4,500 2,571 1,929 75 % Net loss $ (291,863 ) $ (79,894 ) $ (211,969 ) 265 % Weighted average number of common shares outstanding - basic and fully diluted 15,865,641 15,865,641 - - % Basic and diluted loss per common share attributable to common stockholders $ (0.02 ) $ (0.01 ) $ (0.01 ) (50 )% Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 Revenue was $772,341 for the three months ended March 31, 2012, which is an increase of $41,725, or 6%, from $730,616 for the corresponding period in 2011. The increase is primarily from an increase in consumer and enterprise customer services. Net operating loss was $287,798 for the three months ended March 31, 2012, which is an increase of $211,174, or 276% from $76,624 for the corresponding period in 2011. The increase is due to the continued investment in operations growth. Net loss was $291,863 for the three months ended March 31, 2012 compared to $79,894 for the same period of 2011. Liquidity and Capital Resources and Financial Position General On April 1, 2010, we closed the merger with Officeware and stock sale described above under "Our Business-General" and in "Note 3 - Merger with Officeware Corporation" and "Note 4 - Issuance of Common Stock" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012. As of March 31, 2012, we had $1,207,787 of cash, which management anticipates will sustain our operations. Management anticipates that the operating cash flows of the Company will be positive for the fiscal year ending December 31, 2012. However, no assurances can be given that we will ever achieve profitability. If we need to seek additional funds, our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. No assurances can be given that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution. Our goal is to grow the products and services offered through Officeware, which we expect will generate revenue to support our operations. No assurances, however, can be given that these lines of business will generate sufficient operating funds to support our operating activities. In addition, we are exploring whether other companies may have interest in utilizing our technology to deliver their content and allow for interactivity with their customers or users across these various platforms. 11-------------------------------------------------------------------------------- Table of Contents We may also pursue various acquisition targets that could provide us with operating funds to support our activities. In the event that we acquire a target, depending on the nature of that target, we may require additional funds to consummate the acquisition or support our operations going forward. No assurances, however, can be given that we will be able to identify a potential target, consummate the acquisition of the target and, if consummated, integrate the target company and realize funds from operations. Operating Activities. Cash provided by operations was $103,785 in the three months ended March 31, 2012, as compared to $130,448 for the three months ended March 31, 2011. The decrease was primarily from the increase in accounts payable. Investing Activities. Cash used for investing activities was $103,949 and $5,846 for the three months ended March 31, 2012 or March 31, 2011, respectively. The increase was primarily for the purchase of computer equipment. Financing Activities. Cash used for financing activities was $4,791 and $14,608 for the three months ended March 31, 2012 and March 31, 2011. The decrease was primarily from the 2011 payoff of capital leases. Liquidity We believe that the funds received from the issuance of common stock, the cash received in the merger with Officeware, and funds generated by the operation of Officeware will provide us with the necessary funds to operate our business. While we are also undertaking various plans and measures that we believe will increase funds generated from operating activities, no assurances can be given that those plans and measures will be successful. |