DATAJACK, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis contains various "forward-looking
statements" within the meaning of the federal securities laws, regarding future
events or the future financial performance of the Company that involve risks and
uncertainties. Certain statements included in this Form 10-Q, including, without
limitation, statements related to anticipated cash flow sources and uses, and
words including but not limited to "anticipates", "believes", "plans",
"expects", "future" and similar statements or expressions, identify
forward-looking statements. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including but not
limited to, reliance on key customers and competition in its markets, market
demand, product performance, technological developments, maintenance of
relationships with key suppliers, difficulties of hiring or retaining key
personnel and any changes in current accounting rules, all of which may be
beyond the control of the Company. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth herein and in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the
Securities and Exchange Commission, the ("SEC") on April 14, 2014.
When used in this quarterly report, the terms the "Company," "DataJack," "we,"
"our," and "us" refers to DataJack, Inc. formerly known as Quamtel, Inc., a
Nevada corporation. Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") should be read in conjunction with the
unaudited condensed consolidated financial statements included herein. Further,
this quarterly report on Form 10-Q should be read in conjunction with the
Company's Consolidated Financial Statements and Notes to Consolidated Financial
Statements included in its Annual Report on Form10-K for the fiscal year ended
December 31, 2013, filed with the SEC on April 14, 2014.
We were incorporated in 1999 under the laws of Nevada as a communications
company offering, through our subsidiaries, a comprehensive range of mobile
broadband and communications products and services that are designed to meet the
needs of individual consumers, businesses, government subscribers and resellers.
Our operations are organized to meet the needs of our targeted subscriber groups
through focused communications solutions that incorporate the capabilities of
our mobile broadband and communications services.
We offer secure nationwide mobile broadband wireless data transmission services
primarily under the DataJack brand. Through DataJack, we offer low cost, no
contract, mobile broadband with various data plans. Our DataJack service is
offered primarily through two devices - the DataJack MiFi Mobile Hotspot that
can connect up to 8 Wi-Fi enabled devices and the DataJack USB, a Plug and Play
Effective June 5, 2013, DataJack, Inc. sold substantially all of the assets of
WQN, Inc., our wholly-owned subsidiary, to iTalk, Inc., a Nevada corporation
(the "WQN Asset Sale"). The assets included in the sale included all
intellectual rights of WQN, including trade names and trademarks, and all rights
and interests to and in the all customers of the International Long Distance
division of DataJack , Inc., including but without limitation all the customers
and/or subscribers of the following products: My WQN, Easy Talk, Premium and
ValuComm and also including all current and previously registered Customers as
well as all databases. The purchase price was $300,000. WQN accounted for
approximately 47% of the Company's consolidated revenues in 2012.
Effective November 21, 2013, ITG, Inc, (formerly WQN, Inc.) sold, transferred
and delivered all its issued and outstanding common stock shares, with $0.01 par
value, to WW Courier, Inc. for $500 and 10% of future revenue. All remaining
outstanding liabilities related to WQN, Inc. were transferred with the stock
Results of Operations for the Three Months ended March 31, 2014 Compared to the
Same Period in 2013
Our revenues for the three months ended March 31, 2014 and 2013 were $285,241
and $576,520, respectively. DataJack revenues decreased by $53,068 and the WQN
Asset Sale caused revenues to drop substantially during the first quarter of
Cost of Sales and Gross Profit
Cost of sales totaled $180,702 and $480,620 for the three months ended March 31,
2014 and 2013, respectively. This resulted in gross profit of $104,539 (37%) and
$95,900 (17%) for the respective 2014 and 2013 periods. The decrease in cost of
sales and the increase gross margin in 2014 were a result of the WQN Asset Sale.
Operating expenses were $1,382,759 and $620,260 for the three months ended March
31, 2014 and 2013, respectively.
Compensation and consulting expenses increased to $1,035,179 for the three
months ended March 31, 2014 compared to $405,179 for the same period in 2013.
Compensation and consulting expenses are primarily a result of the issuance of
common shares for board of director fees in the amount of $291,875 and bonuses
in the amount of $377,000.
General and administrative ("G&A") expenses were $332,984 and $192,772 for the
three months ended March 31, 2014 and 2013, respectively.
Other Income and Expense
Other income and expenses increased to a net other expense of $777,303 for the
three months ended March 31, 2014 compared to a net other income of $274,955 for
the three months ended March 31, 2013. The $1,052,258 increase in expense is
directly attributable to the loss from change in fair value of derivative
liability of $928,050 during the three months ended March 31, 2014 as compared
to a gain of $470,445 for the same period last year. The loss was offset with a
gain on settlement of debt of $384,883 for the three months ended March 31, 2014
compared to nil for the same period last year. In the three months ended March
31, 2014, the Company amortized $213,105 of debt discount as compared to $18,334
the same period, last year. Interest expense has decreased in the three months
ended March 31, 2014 to $21,031 compared to $177,156 for the same period last
An increase in compensation and consulting expenses, loss on derivative
liability; off-set by gain on settlement of debt resulted in a net loss of
$2,059,523 for the three months ended March 31, 2014, compared to a net loss of
$249,405 for the same period in 2013.
Liquidity and Capital Resources
Cash and cash equivalents were $148 at March 31, 2014. Our net cash used in
operating activities for the three months ended March 31, 2014 was $407,556 due
primarily to our net loss during this period.
Our primary sources of funding for the three months ended March 31, 2014 have
been proceeds in the amount of $386,985 from advances from related parties, net
of repayments of notes of $8,500.
At March 31, 2014, restricted cash consisted of a $150,000 security deposit in
the form of an irrevocable letter of credit held in escrow related to our
performance under a service contract with one of our telecommunication service
We believe that anticipated cash fows from operations will be insufficient to
satisfy our ongoing capital requirements. Our ability to meet our obligations
and continue to operate as a going concern is highly dependent on our ability to
obtain new loans and/or successfully enter into settlement agreements with our
vendors. We cannot predict whether this additional financing will be in the form
of equity or debt, or be in another form. We may not be able to obtain the
necessary additional capital on a timely basis, on acceptable terms, or at all.
In any of these events, we may be unable to implement our current plans which
circumstances would have a material adverse effect on our business, prospects,
financial condition and results of operations.
Our accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern.
We have incurred operating losses and negative cash flows from operations during
the past two years, have incurred an accumulated deficit of $27,482,485 through
March 31, 2014, and have been dependent on issuances of debt and equity
instruments to fund our operations. We intend to generate future profitability
and seek new sources or methods of financing or revenue to pursue our business
strategy. However, there can be no certainty that we will be successful in this
strategy. These factors raise substantial doubt about our ability to continue as
a going concern. Accordingly, our independent auditors added an explanatory
paragraph to their opinion on our consolidated financial statements for the year
ended December 31, 2013, based on substantial doubt about our ability to
continue as a going concern.
Our unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties. We expect
to raise any necessary additional funds through loans and additional sales of
our common stock or debt instruments. There can be no assurance that we will be
successful in raising additional capital in amounts or on terms acceptable to
us, if at all.
Capital Expenditure Commitments
We did not have any substantial outstanding commitments to purchase capital
equipment at March 31, 2014.
We expect to adjust our operations and development to the level of
capitalization, but we may not have sufficient capital resources to meet
projected cash flow requirements for the next three months. If during that
period or thereafter, we are not successful in generating sufficient liquidity
from operations or in raising sufficient capital resources, on terms acceptable
to us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our future cash requirements include those associated with maintaining our
status as a reporting entity. We believe that on an annual basis those costs
would not exceed an average of $25,000 per month.
We presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief operating history and lack of substantial
historical operating profits, our operations have not been a source of
liquidity. We will need to obtain additional capital in order to fund our
operations and become profitable. In order to obtain capital, we may need to
sell additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional
funding in amounts or on terms acceptable to us, if at all.
Critical Accounting Policies
The application of our accounting policies, which are important to our financial
position and results of operations, requires significant judgments and estimates
on the part of management. These estimates bear the risk of change due to the
inherent uncertainty attached to the estimate and are likely to differ to some
extent from actual results. A description of our critical accounting policies
1. In accordance with FASB ASC 350 (formerly Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," the Company tests
its intangible asset (goodwill) for impairment at least annually by comparing
the fair value of this asset to its carrying value. If in the future the
carrying value of our goodwill exceeds its fair value, the Company will
recognize an impairment charge in an amount equal to that excess. For
purposes of these tests, the excess of the fair value of the Company over the
amounts assigned to its identified assets and liabilities is the implied fair
value of its goodwill. In 2012, the Company recognized related impairment
charges of $749,642 in its consolidated statement of operations. No
additional impairment charges were recognized in 2013 or the three months
ended March 31, 2014.
2. The Company has identified embedded derivatives related to certain of its
notes payable. These embedded derivatives include certain conversion features
and reset provisions. The accounting treatment of derivative financial
instruments requires that the Company record fair value of the derivatives as
of the inception date of the above described Convertible Note Payable and to
fair value as of each subsequent reporting date. For the three months ended
March 31, 2014 and 2013, the Company recognized related derivative
mark-to-market (charges) income of ($928,050) and $470,445, respectively, in
its consolidated statement of operations.
3. The amount of cash paid and the value of common stock issued that are related
to contract renegotiations and debt issuances are capitalized, and classified
as a noncurrent deferred cost on the Company's consolidated balance sheet.
These deferred costs are amortized to expense over the term of the underlying
contracts or debt instruments.
4. Compensation costs related to share-based payment transactions are recognized
in the statement of operations. With limited exceptions, the amount of
compensation cost will be measured based on the grant- date fair value of the
equity or liability instruments issued. In addition, liability awards will be
remeasured each reporting period. The Company's common shares issued as
additional compensation and for consulting services have been valued at the
shares' exchange-quoted market prices at their respective dates of issuance
or commitment. Compensation costs are recognized over the period that an
employee provides service in exchange for the award.
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