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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 13 · Results of Operations - Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011 · Liquidity and Capital Resources - Three Months Ended December 31, 2012NOTE 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 21, 2012 for the year ended September 30, 2012. 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. 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. 14 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 three months ended December 31, 2012 decreased when compared to the same period in fiscal 2012 from $6,948,297 to $6,027,452, due primarily to the sale of subscribers and related property and equipment to Access Media 3, Inc. ("AM3") and others. EBITDA (as adjusted) increased for the quarter ended December 31, 2012 to $2,135,383, compared to EBITDA (as adjusted) for the quarter ended December 31, 2011 of $583,011. A significant contributor to the EBITDA increase was the $1.8 million gain from the sale of subscribers and related property and equipment to AM3. All of the Company's operating costs decreased for the quarter ended December 31, 2012 compared to the quarter ended December 31, 2011, due mainly to cost reductions and a smaller subscriber base. Direct costs decreased by 10%, sales expense decreased by 20%, general and administrative expense decreased by 6%, and customer service and operating expense decreased by 13%. Depreciation and amortization expense also decreased by 22% between the periods. The Company reports 67,367 subscribers to its services as of December 31, 2012, a reduction in total subscribers when compared to the previous fiscal quarter ended September 30, 2012, due mainly to the sale of twenty five properties and subscribers during the period to AM3. The reduction compared to December 31, 2011 was due to the aforementioned, as well as (i) the sale of an additional nineteen properties to AM3, three properties to divisions of Charter Communications and two properties to Summit Broadband, (ii) the transfer of six properties to DIRECTV under the Connected Properties program, and (iii) the non-renewal of certain private cable bulk properties and certain choice properties that the Company chose not to upgrade to digital services for economic reasons. During the quarter ended December 31, 2012, the Company had 14 properties and 2,802 units in work-in-process that should contribute to organic growth in the upcoming quarters. Due to capital constraints, the Company is currently only deploying services to new properties where those property owners are willing to pay for systems and installation services. The Company's breakdown of total subscribers by type is outlined below: Subscribers Subscribers Subscribers Subscribers Subscribers as of as of as of as of as of Service Type Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012 Dec. 31, 2012 Bulk DTH 20,491 21,136 21,361 21,098 20,873 Bulk BCA 9,880 9,106 8,681 8,441 8,065 DTH -Choice/Exclusive 20,527 20,320 19,427 18,459 16,948 Bulk Private Cable 12,188 12,188 12,178 10,719 9,845 Private Cable Choice/ Exclusive 2,782 2,740 1,995 1,787 1,825 Bulk ISP 5,363 5,363 5,361 5,361 5,421 ISP Choice or Exclusive 5,034 4,986 4,565 4,441 4,376 Voice 19 20 22 22 14 Total Subscribers 76,284 75,859 73,590 70,328 67,367 15 The Company's average revenue per unit ("ARPU") at December 31, 2012 was $29.23, a 4% decrease from the year ended September 30, 2012 of $30.36. 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 decrease is due primarily to higher installation revenue and Connected Properties revenue in the APRU for the year ended September 30, 2012. The Company continues to believe that its recurring revenue and ARPU will continue to be positively impacted by an increasing DIRECTV ARPU (the average revenue generated by a DIRECTV subscriber was up 4.6% in DIRECTV's fiscal quarter ending September 30, 2012 to $96.41, as disclosed in DIRECTV's public filings). On September 7, 2012, the Company entered into an agreement with AM3 to sell nineteen properties at a price of $625 per subscriber. A second closing under the September 7, 2012 agreement occurred on November 1, 2012 for twelve additional properties at a price of $625 per subscriber and a third closing under the September 7, 2012 agreement occurred on December 11, 2012 for an additional thirteen properties at a price of $625 per subscriber. Negotiations for additional smaller asset sales are continuing and progressing. On July 9, 2012, the Company signed a definitive agreement pursuant to which the Company will merge into Multiband Corporation ("Multiband") and will effectively continue to operate as a subsidiary of Multiband in its MDU business segment. Originally, Multiband was to have issued 4.3 million shares of its common stock for all issued and outstanding shares of MDU Communications common stock, with certain potential adjustments. On September 17, 2012, Multiband amended its offer to a cash for stock offer with a total cash payout of $12.9 million. On December 26, 2012, Multiband again amended its offer to a convertible preferred stock with a coupon for the Company's outstanding shares. Terms are still being negotiated and conditions precedent still exist. Assuming the remaining conditions precedent can be satisfied, the Company will submit the merger to a vote of the stockholders at the soonest practicable date. Multiband, as a whole, operates with 3,700 employees in 33 states with 33 field offices. The companies anticipate the merger to close in February or March 2013, subject to Company stockholder approval. For further information please review the Company's 8-K filed with the Securities and Exchange Commission on July 10, 2012 and Multiband's 8-K filed with the Securities and Exchange Commission on September 17, 2012 and December 26, 2012. The Company makes no representations that the merger will result in a closed transaction. To assist the Company in assessing its future strategic plans, the Company previously retained the investment advisory firm of Berkery, Noyes & Co. ("BN"). BN is representing the Company in the merger with Multiband, in the asset sales with AM3 and continues to advise the Company in financing, merger and divestiture related discussions. The Company does not expect its revenues, available cash and remaining availability under its Credit Facility to be sufficient to cover estimated liquidity needs for the next twelve months. Without additional funding sources, significant asset sales, or a merger, the Company forecasts that its capital may be depleted during its second fiscal quarter 2013. To conserve capital, the Company has been actively pursuing a number of initiatives intended to reduce costs, including layoffs, reductions in benefits, limitation on travel, scaled back marketing efforts, restricted stock for forfeited salary and across-the-board employee salary reductions. The Company is currently only maintaining existing operations and is no longer deploying services into new properties unless the cost of the system is funded by the property owner. Although these measures assist in conserving cash, the Company's ability to continue to operate is dependent on the ability to raise additional capital, sell a significant number of assets, or enter into a merger. There can be no assurance that these efforts will be successful. Additionally, the Company will be facing maturity and repayment of its Credit Facility on June 30, 2013. 16 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, 2012 and 2011, the Company reported EBITDA (as adjusted) of $2,135,383 and $583,011, 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: 17 For Three Months Ended December 31, 2012 2011 EBITDA $ 2,135,383 $ 583,011 Interest expense (781,480 ) (777,646 )Deferred finance costs and debt discount amortization (interest expense) (96,815 ) (96,816 ) Provision for doubtful accounts (173,893 ) (145,006 ) Depreciation and amortization (1,210,147 ) (1,550,772 ) Share-based compensation expense - employees (9,551 ) (15,347 ) Compensation expense through the issuance of restricted common stock - (34,864 ) Net Loss $ (136,503 ) $ (2,037,440 ) 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, 2012, there were no material changes to accounting estimates or judgments. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In September 2011, the Financial Accounting Standards Board ("FASB") approved a revised standard "Goodwill Impairment Testing" that simplifies how entities test goodwill for impairment. The revised standard permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The standard does not address impairment testing of indefinite-lived intangibles. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and was adopted as required on October 1, 2012. 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 had no material impact. In December 2011, the FASB approved an amendment in certain pending paragraphs in Accounting Standards "Comprehensive Income: Presentation of Comprehensive Income" to effectively defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The amendment to "Comprehensive Income: Presentation of Comprehensive Income" is effective for fiscal years beginning after December 15, 2011 and was adopted as required on October 1, 2012. 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 had no material impact. 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. 18 THREE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2011 The following table sets forth for the three months ended December 31, 2012 and 2011 the percentages which selected items in the Statements of Operations bear to total revenue and dollar and percentage changes between the periods: Three Months Ended Three Months Ended Change Change December 31, 2012 December 31, 2011 ($) (%) REVENUE $ 6,027,452 100 % $ 6,948,297 100 % $ (920,845 ) -13 % Direct costs 3,095,059 51 % 3,436,801 49 % (341,742 ) -10 % Sales expenses 312,039 5 % 391,658 5 % (79,619 ) -20 % Customer service and operating expenses 1,433,266 24 % 1,638,639 24 % (205,373 ) -13 % General and administrative expenses 1,036,112 17 % 1,099,090 16 % (62,978 ) -6 % Depreciation and amortization 1,210,147 20 % 1,550,772 22 % (340,625 ) -22 % Gain on sale of customers and property and equipment (1,800,963 ) -30 % (5,685 ) 0 % (1,795,278 ) n/a OPERATING INCOME (LOSS) 741,792 13 % (1,162,978 ) -16 % 1,904,770 164 % Interest expense (878,295 ) -15 % (874,462 ) -13 % (3,833 ) 0 % NET LOSS $ (136,503 ) -2 % $ (2,037,440 ) -29 % $ 1,900,937 -93 % Revenue. Revenue for the three months ended December 31, 2012 was $6,027,452, compared to revenue of $6,948,297 for the three months ended December 31, 2011. This decrease in recurring revenue is mainly attributable to the sale of subscribers and related property and equipment to AM3 and others between the periods. The Company expects total revenue to remain constant or slightly decrease during the remainder of fiscal 2013 as the Company remains in a growth holding pattern. Revenue has been derived, as a percent, from the followingsources: Three Months Ended Three Months Ended December 31, 2012 December 31, 2011Private cable programming revenue $ 560,137 9 % $ 812,384 12 % DTH programming revenue and subsidy 4,411,624 73 % 4,845,784 70 % Internet access fees 726,049 12 % 771,014 11 % Installation fees, wiring and other revenue 329,642 6% 519,115 7 % Total revenue $ 6,027,452 100 % $ 6,948,297 100 % The decrease in revenue across all categories is due mainly to the sale of subscribers and related property and equipment to AM3 and others between the periods and the fact that the Company is in a growth holding pattern. Because the Company has no immediate plans for growth, revenue from these sources is expected to remain constant or slightly decrease during fiscal 2013. Direct Costs. Direct costs are comprised of programming costs, monthly recurring broadband circuits and costs relating directly to installation services. Direct costs decreased to $3,095,059 for the three months ended December 31, 2012, compared to $3,436,801 for the three months ended December 31, 2011. 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 sale of subscribers to AM3, direct costs (in dollars) declined, but due to the acquisition of ATTVS DISH subscribers during the quarter ended December 31, 2011 (whereby the Company incurs the full programming cost), direct costs increased (as a percent of revenue) over that quarter. Direct costs are expected to remain constant or decrease during fiscal 2013 as the Company maintains current operations only or continues to sell certain properties and subscribers. 19 Sales Expenses. Sales expenses decreased to $312,039 for the three months ended December 31, 2012, compared to $391,658 for the three months ended December 31, 2011. During the remainder of fiscal 2013, the Company expects these expenses to remain fairly constant or decrease slightly as sales and marketing efforts are scaled back and remain strictly focused. 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 $1,433,266 and $1,638,639 for the three months ended December 31, 2012 and 2011, respectively. Customer service and operating expenses are generally expected to remain constant during the remainder of fiscal 2013 as the Company has no immediate plans for growth, but may decrease as the Company attempts to decrease costs. A breakdown of customer service and operating expenses is as follows: Three Months Ended Three Months Ended December 31, 2012 December 31, 2011 Call center expenses $ 640,121 45 % $ 641,267 39 % General operation expenses 274,221 19 % 290,304 18 %Property system maintenance expenses 518,924 36 % 707,068 43 % Total customer service and operation expense $ 1,433,266 100% $ 1,638,639 100 % Because the full transition of subscribers to AM3 did not occur until late in the quarter ended December 31, 2012, call center expenses remained fairly flat over the same period in the previous year. General operations expenses decreased slightly due to cost reductions. Property maintenance was more quickly transitioned to AM3 so the decrease was due primarily to sale of properties to AM3 and others between the periods. General and Administrative Expenses. General and administrative expenses for the three months ended December 31, 2012 and 2011 decreased to $1,036,112 from $1,099,090, respectively. Of the general and administrative expenses for the three months ended December 31, 2012 and 2011, the Company had total noncash charges included of $183,444 and $195,217, respectively. Excluding the $183,444 and $195,217 in noncash charges from the three months ended December 31, 2012 and 2011, respectively, general and administrative expenses were $852,668 and $903,873, respectively. General and administrative expenses are fairly fixed and should remain constant throughout the remainder of fiscal 2013, but may increase with any expenses related to an asset sale or merger. 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, 2012 and 2011, amortized over the requisite vesting period, of $9,551 and $15,347, respectively. The total share-based compensation expense not yet recognized and expected to vest over the next 14 months is approximately $21,000. Other Noncash Charges. Depreciation and amortization expenses decreased from $1,550,772 for the three months ended December 31, 2011, to $1,210,147 for the three months ended December 31, 2012. 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 $1,490,407, the Company reported a net loss of $136,503 for the three months ended December 31, 2012, compared to noncash charges of $1,842,805 and a reported net loss of $2,037,440 for the three months ended December 31, 2011. LIQUIDITY AND CAPITAL RESOURCES During the three months ended December 31, 2012 and 2011, the Company recorded net losses of $136,503 and $2,037,440, respectively. Company operations used net cash of $388,103 and $298,163 during the three months ended December 31, 2012 and 2011, respectively. At December 31, 2012, the Company had an accumulated deficit of $74,835,666. 20 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, for $30 million in total, 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 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 $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 made a repayment of $1,507,724 on its Credit Facility for the three monthsended December 31, 2012. The amount the Company can draw from the Credit Facility is equal to the lesser of $30 million or the Company's borrowing base, which, in large part, is determined by future revenues and costs accruing from the Company's access agreements. The borrowing base was $27,730,356 at December 31, 2012 and as of that date, the Company has borrowed a total of $27,096,637 (not including debt discount of $22,145), which is due on June 30, 2013. As of December 31, 2012, $633,719 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; · 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, 2012 and 2011 due to the net loss. The net operating loss carry forward expires on various dates through 2032; therefore, the Company should not incur cash needs for income taxes for the foreseeable future. As of December 31, 2012, the Company had available cash and remaining available Credit Facility, collectively, of $683,652. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources, proceeds from asset sales, or a merger, the Company forecasts that its available capital will be depleted sometime during its second fiscal quarter 2013. Additionally, the Company will be facing maturity and repayment of its Credit Facility on June 30, 2013. 21 In order for the Company to continue operations and to fully implement its business plan, it needs to raise additional capital or merge. The Company has been actively pursuing various initiatives aimed at resolving its need for additional capital, namely asset sales and/or a merger. Asset sale negotiations have met with some success for certain assets, but have not yet resulted in larger asset sales. Additionally, on July 9, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband Corporation. Although several conditions precedent still exist, the Company is working toward closing the merger in February or March 2013. The Company's ability to close asset sales or to consummate the merger remains uncertain. Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about the Company's ability to continue as a going concern. THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011 During the three months ended December 31, 2012 and 2011, the Company recorded net losses of $136,503 and $2,037,440, respectively. At December 31, 2012, the Company had an accumulated deficit of $74,835,666. Cash Balance. At December 31, 2012, the Company had cash and cash equivalents of $49,933, compared to $104,124 at September 30, 2012. 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, 2012, the Company decreased the amount borrowed against the Credit Facility by $1,507,724. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources, proceeds from asset sales, or a merger, the Company forecasts that its available capital will be depleted sometime during its second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of its Credit Facility on June 30, 2013. Operating Activities. Company operations used net cash of $388,013 and $298,163 during the three months ended December 31, 2012 and 2011, respectively. Net cash used in operating activities included an increase of $63,054 and decrease of $546,776 in accounts payable and other accrued liabilities during the three months ended December 31, 2012 and 2011, respectively. Additionally, during the three months ended December 31, 2012 and 2011, there was a decrease of $36,641 and $86,143 in accounts and other receivables, respectively, and prepaid expenses increased by $29,173 and decreased by $379,165, respectively. During the three months ended December 31, 2012 and 2011, deferred revenue decreased by $11,476 and $19,124, respectively. Net loss for the three months ended December 31, 2012 and 2011 was $136,503 and $2,037,440, respectively, inclusive of net noncash charges associated primarily with depreciation and amortization and stock options and warrants of $1,490,407 and $1,842,805, respectively. Investing Activities. During the three months ended December 31, 2012 and 2011, the Company purchased $462,204 and $609,404, respectively, of equipment relating to subscriber additions and HD upgrades for the periods and for future periods. During the three months ended December 31, 2012, the Company received $2,353,750 in proceeds from the sale of subscribers and related property and equipment to AM3. During the three months ended December 31, 2011, the Company received $29,976 for the sale of subscribers and related property and equipment to DIRECTV as part of the Connected Properties initiative. Financing Activities. During the three months ended December 31, 2012 and 2011, the Company incurred $50,000 in deferred financing costs in each period, and decreased by $1,507,724 and increased by $1,170,286, respectively, the amount borrowed through the Credit Facility. Working Capital. As of December 31, 2012, the Company had negative working capital of $29,540,636, compared to negative working capital of $30,714,006 as of September 30, 2012. To minimize the draw on the Credit Facility and the liability, the Company expects to have negative working capital in fiscal 2013. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources, proceeds from asset sales, or a merger, the Company forecasts that its available capital will be depleted sometime during its second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of its Credit Facility on June 30, 2013. 22 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. For the Company to continue operations and capitalize on future strategic plans, it will be required to raise additional capital. The Company has been actively pursuing various initiatives aimed at resolving its need for additional capital, specifically asset sales. These negotiations have met with some success for certain assets, but have not resulted in larger asset sales. The Company's ability to raise sufficient additional capital, through asset sales or otherwise, on acceptable terms or at all, remains uncertain. Additionally, the Company will be facing maturity and repayment of its Credit Facility on June 30, 2013. On July 9, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband Corporation. Although several conditions precedent still exist, the Company is working toward closing the merger in February or March 2013; however, there can be no assurance that the merger will close. Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about the Company's ability to continue as a going concern. |