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Management's Discussion and Analysis of Financial Condition and(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations CAUTIONARY STATEMENT This document includes statements that may constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution readers regarding certain forward-looking statements in this document, press releases, securities filings, and all other documents and communications. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q ("Report") are forward looking. The words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." While we believe in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. As a result of such risks, our actual results could differ materially from those expressed in any forward-looking statements made by, or on behalf of, our company. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks and uncertainties set forth in our Annual Report on Form 10-K, as well as in other documents we file with the Securities and Exchange Commission ("SEC"). The following information has not been audited. You should read this information in conjunction with the unaudited financial statements and related notes to the financial statements included in this report. OVERVIEW OF THE COMPANY We design and market to business customers digital watermarking, streaming video and video-on-demand (VOD) systems, services and source-to-destination digital media delivery solutions that allow live or recorded digitized and compressed video to be transmitted through Internet, intranet, satellite or wireless connectivity. The Company's systems, services and delivery solutions include digital watermark solutions and video content production, content encoding, media asset management, media and application hosting, multi-mode content distribution, transaction data capture and reporting, e-commerce, specialized engineering services, and Internet streaming hardware. The Company's products and services are based on its media delivery infrastructure and software. It has developed a number of specific products and services. These include MediaSentinel and SmartMarks, a process that watermarks digital video content; StreamHQ, a collection of source-to-destination media delivery services marketed to businesses; EncodeHQ, a service that digitizes and compresses analog-source video; hardware server and encoder system applications under the brand name Hurricane Mediacaster; ZMail, a service that delivers Web and rich media content to targeted audiences, and mediaClix, a service that delivers content similar to Zmail but originating from an existing Web presence. As more fully discussed below we have not been profitable, and our revenues for the three-months ended March 31, 2012 were $9,000. We cannot predict our revenue levels for the next 3 months, or thereafter, nor when, or if, our operations will become profitable. We will require additional financing, both for the next 3 months and thereafter, to continue to operate and expand our business. There is no assurance that such financing will be available on commercially reasonable terms, if at all. - 10 - BUSINESS OBJECTIVES: We have established the following near-term business objectives: 1. Patent and license new technology developed within the corporate research and development program; 2. Attain industry recognition for the superior architectural, functional, and business differentiators of our MediaSentinel™ architecture; 3. Demonstrate proof of concept on a commercial project with MediaSentinel™ architecture; 4. Establish StreamHQ™ as the industry standard in the streaming video and rich media marketplace; 5. Expand StreamHQ™ functionality to provide enhanced support for corporate training and education markets. CRITICAL ACCOUNTING POLICIES (AND ESTIMATES) Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management's discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results: - Revenue recognition; - Impairment or disposal of long-lived assets; - Deferred taxes; - Accounting for stock-based compensation; and - Commitments and contingencies. REVENUE RECOGNITION. Revenue is recognized for digital water marking based on a contracted usage schedule on a monthly billing cycle. Software revenue and other services are recognized in accordance with the terms of the specific agreement, which is generally upon delivery and when accepted by customer. Maintenance, support and service revenue are recognized ratably over the term of the related agreement. In order to recognize revenue, we must not have any continuing obligations and it must also be probable that we will collect the accounts receivable. - 11 - IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Long-lived assets are reviewed in accordance with ASC Topic 360-10-05. Impairment or disposal of long-lived assets losses are recognized in the period the impairment or disposal occurs. DEFERRED TAXES. We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. ACCOUNTING FOR STOCK-BASED COMPENSATION. Under ASC Topic 718, Stock Compensation (formerly referred to as SFAS No. 123(R)), the Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed is based on estimated forfeiture rate, which is updated based on actual forfeitures as appropriate. This option pricing model requires the input of highly subjective assumptions, including the expected volatility of the Company's common stock, pre-vesting forfeiture rate and an option's expected life. The financial statements include amounts that are based on the Company's best estimates and judgments. COMMITMENTS AND CONTINGENCIES. We account for commitments and contingencies in accordance with ASC Topic 450 Contingencies (formerly referred to as financial accounting standards board Statement No. 5, Accounting for Contingencies). We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable. RESULTS OF OPERATIONS Sales Sales for the three-month period ended March 31, 2012 and 2011 were $9,000. Revenues were generated from Software License Agreement from our Smartmark™ Software. Sales for 2012 and 2012 were from one customer. Cost of Sales The cost of sales for the three months ended March 31, 2012 and 2011 were $1,350. Costs are the royalties on our video watermarking license agreement. Selling, General and Administrative Expenses Selling, general and administrative expenses, consisting of product marketing expenses, consulting fees, office, professional fees and other expenses to execute our business plan and for our day-to-day operations, increased in the three months ending March 31, 2012. We have a contract for our Smartmark™ Software and delivered acceptable release to start billing and delivered additional server licenses. Product marketing costs increased due to management's decision to market to additional companies. Professional and filing fees increased due to the changes in the reverse split of our stock. Administrative expenses have increased as a result. Selling, general and administrative expenses for the three months ended March 31, 2012 increased by $29,940 to $66,757 from $36,817 for the three months ended March 31, 2011. The increase was the result of expenses incurred related to product marketing expenses, professional fees and filing fees. - 12 - Product marketing costs for the three months ended March 31, 2012, increased to$17,743 from $-0- for the comparable period in 2011. We incurred increased costs in 2012 due to management's decision to expand the company's customer base. Professional fees for the three months ended March 31, 2012, increased to$12,918 from $5,894 for the comparable period in 2011. We incurred increased costs in 2012 due to cost associated with the company stock split. Salaries and fees for the three months ended March 31, 2012 and 2011 were $-0-. No cost were incurred due to management and employee reductions. We have arranged for additional staff and consultants to engage in marketing activities in an effort to identify and assess appropriate market segments, develop business arrangements with prospective partners, create awareness of new products and services, and communicate to the industry and potential customers. Other components of selling, general and administrative expense did not change significantly. Net Losses To date, we have not achieved profitability and expect to incur substantial losses for the foreseeable future. Our net loss for the three-months ended March 31, 2012 was $98,503, compared with a net loss of $29,167 for 2011. Liquidity and Capital Resources At March 31, 2012 our cash position was $15,277, a decrease of $84,556 from December 31, 2011. We had a working capital deficit of $589,753 and an accumulated deficit of $39,345,391 at March 31, 2012. We have historically satisfied our capital needs primarily by issuing equity securities to our officers, directors, employees and a small group of investors, and from short-term bridge loans from members of management. During the three-months ended March 31, 2012, no proceeds were received from officers, directors, employees and a small group of investors short term loans. We will require additional financing to fund current operations through fiscal 2012. We have historically satisfied our capital needs primarily by issuing equity securities. We will require an additional $0.75 million to $1.25 million to finance operations through fiscal 2012 and we intend to seek such financing through sales of our equity securities. Assuming the aforementioned $0.75 million to $1.25 million in financing is obtained, we believe that continuing operations for the longer term will be supported through anticipated licensing revenues and through additional sales of our securities. We have no binding commitments or arrangements for additional financing, and there is no assurance that we will be able to obtain any additional financing on terms acceptable to us, if at all. OFF-BALANCE SHEET ARRANGEMENTS We do not maintain any off-balance sheet transactions, arrangements, or obligations that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, or capital resources. - 13 - Item 3. |