SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT
OF 1934
|
FOR
THE PERIOD ENDING MARCH 31, 2006
|
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT
OF 1934 FOR
THE TRANSITION PERIOD FROM ____
TO ____
|
|
|
COMMISSION
FILE NUMBER 0 - 1325
|
|
|
___________
MULTIBAND
CORPORATION
(Exact
name of registrant as specified in its charter)
MINNESOTA
(State
or
other jurisdiction of incorporation or organization)
41 - 1255001
(IRS
Employer Identification No.)
9449
Science Center Drive, New Hope, Minnesota 55428
(Address
of principal executive offices)
Telephone
(763) 504-3000 Fax (763) 504-3060
Internet: www.multibandusa.com
(Registrant's
telephone number, facsimile number, and Internet address)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
On
May 1,
2006 there were 32,539,170 shares outstanding of the registrant's common stock,
no par value, and 446,098 outstanding shares of the registrant's convertible
preferred stock.
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2006 (unaudited)
|
|
|
March
31, 2005
(unaudited)
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
4,404,044
|
|
$
|
3,706,876
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of products and services (exclusive of depreciation and amortization
shown
separately below)
|
|
|
2,056,527
|
|
|
1,872,268
|
|
Selling,
general and administrative
|
|
|
2,972,223
|
|
|
2,146,912
|
|
Depreciation
and amortization
|
|
|
1,302,456
|
|
|
1,148,867
|
|
Total
costs and expenses
|
|
|
6,331,206
|
|
|
5,168,047
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,927,162
|
)
|
|
(1,461,171
|
)
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(304,681
|
)
|
|
(685,701
|
)
|
Other
income (expense)
|
|
|
41,437
|
|
|
4,932
|
|
Total
other expense
|
|
|
(263,244
|
)
|
|
(680,769
|
)
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(2,190,406
|
)
|
|
(2,141,940
|
)
|
GAIN
(LOSS) FROM DISCONTINUED OPERATIONS
|
|
|
2,200
|
|
|
(441,268
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(2,188,206
|
)
|
|
(2,583,208
|
)
|
Preferred
stock dividends
|
|
|
263,106
|
|
|
931,084
|
|
|
|
|
|
|
|
|
|
LOSS
ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(2,451,312
|
)
|
$
|
(3,514,292
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
$
|
(.07
|
)
|
$
|
(.08
|
)
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
$
|
-
|
|
$
|
(.01
|
)
|
NET
LOSS
|
|
$
|
(.07
|
)
|
$
|
(.09
|
)
|
LOSS
ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(.08
|
)
|
$
|
(.13
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
32,155,873
|
|
|
27,216,574
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
March
31, 2006 (unaudited)
|
|
|
December
31, 2005 (audited)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,100,540
|
|
$
|
3,100,427
|
|
Accounts
receivable, net
|
|
|
2,102,391
|
|
|
2,367,864
|
|
Inventories
|
|
|
222,698
|
|
|
241,015
|
|
Prepaid
expenses and other
|
|
|
211,525
|
|
|
216,885
|
|
Current
portion of notes receivable
|
|
|
6,000
|
|
|
11,316
|
|
Total
Current Assets
|
|
|
4,643,154
|
|
|
5,937,507
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
5,235,877
|
|
|
5,247,240
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
954,871
|
|
|
954,871
|
|
Intangible
assets, net
|
|
|
13,061,724
|
|
|
13,923,542
|
|
Notes
receivable - long-term, net
|
|
|
65,451
|
|
|
61,341
|
|
Other
assets
|
|
|
163,744
|
|
|
146,904
|
|
Total
Other Assets
|
|
|
14,245,790
|
|
|
15,086,658
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
24,124,821
|
|
$
|
26,271,405
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Checks
issued in excess of cash in bank
|
|
$
|
-
|
|
$
|
93,005
|
|
Mandatory
redeemable preferred stock, 28,000 and 33,334 Class F preferred
shares
|
|
|
280,000
|
|
|
333,334
|
|
Current
portion of long-term debt
|
|
|
523,314
|
|
|
616,260
|
|
Current
portion of note payable - stockholder
|
|
|
30,000
|
|
|
32,837
|
|
Current
portion of capital lease obligations
|
|
|
179,434
|
|
|
179,932
|
|
Accounts
payable
|
|
|
1,951,326
|
|
|
1,761,249
|
|
Accrued
liabilities
|
|
|
2,860,840
|
|
|
2,741,054
|
|
Customer
deposits
|
|
|
62,685
|
|
|
64,161
|
|
Current
liabilities of discontinued operations
|
|
|
500,000
|
|
|
500,000
|
|
Deferred
service obligations and revenue
|
|
|
637,475
|
|
|
587,093
|
|
Total
Current Liabilities
|
|
|
7,025,074
|
|
|
6,908,925
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
|
3,778,088
|
|
|
3,816,536
|
|
Capital
lease obligations, net of current portion
|
|
|
416,434
|
|
|
452,649
|
|
Long-term
liabilities of discontinued operations
|
|
|
-
|
|
|
125,000
|
|
Total
Liabilities
|
|
|
11,219,596
|
|
|
11,303,110
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock, no par value:
|
|
|
|
|
|
|
|
8%
Class A (27,651 and 27,931 shares issued and outstanding, $290,336
and
$293,276 liquidation preference)
|
|
|
416,952
|
|
|
419,752
|
|
10%
Class B (8,300 and 8,390 shares issued and outstanding, $87,150 and
$88,095 liquidation preference)
|
|
|
58,000
|
|
|
58,900
|
|
10%
Class C (124,960 and 125,050 shares issued and outstanding, $1,249,600
and
$1,250,500 liquidation preference)
|
|
|
1,606,705
|
|
|
1,607,605
|
|
10%
Class F (150,000 and 150,000 shares issues and outstanding, $1,500,000
and
$1,500,000 liquidation preference)
|
|
|
1,500,000
|
|
|
1,500,000
|
|
8%
Class G (45,245 and 45,245 shares issued and outstanding, $452,450
and
$452,450 liquidation preference)
|
|
|
179,897
|
|
|
179,897
|
|
6%
Class H (2.0 and 2.0 shares issued and outstanding, $200,000 and
$200,000
liquidation preference)
|
|
|
-
|
|
|
-
|
|
Variable
rate % Class I (90,000 and 90,000 shares issued and outstanding,
$9,000,000 and $9,000,000 liquidation preference)
|
|
|
-
|
|
|
-
|
|
Common
stock, no par value (32,172,891 and 32,134,558 shares issued and
outstanding)
|
|
|
22,836,072
|
|
|
22,801,405
|
|
Stock
subscriptions receivable
|
|
|
(285,173
|
)
|
|
(297,105
|
)
|
Options
and warrants
|
|
|
44,575,922
|
|
|
44,259,540
|
|
Unamortized
compensation
|
|
|
-
|
|
|
(29,861
|
)
|
Accumulated
deficit
|
|
|
(57,983,150
|
)
|
|
(55,531,838
|
)
|
Total
Stockholders' Equity
|
|
|
12,905,225
|
|
|
14,968,295
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
24,124,821
|
|
$
|
26,271,405
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
THREE
MONTHS ENDED MARCH
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,188,206
|
)
|
$
|
(2,583,208
|
)
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,345,846
|
|
|
1,273,112
|
|
Amortization
of deferred compensation
|
|
|
29,480
|
|
|
17,761
|
|
Amortization
of original issue discount
|
|
|
114,908
|
|
|
500,098
|
|
Gain
on sale of segment
|
|
|
-
|
|
|
(103,491
|
)
|
Common
stock issued for services
|
|
|
-
|
|
|
19,200
|
|
Increase
in notes receivable allowance
|
|
|
-
|
|
|
89,051
|
|
Reserve
for stock subscriptions and interest receivable
|
|
|
5,932
|
|
|
-
|
|
Stock
based compensation expense
|
|
|
316,763
|
|
|
-
|
|
Change
in allowance for doubtful accounts on accounts receivable
|
|
|
(191,450
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
456,923
|
|
|
(515,012
|
)
|
Inventories
|
|
|
18,317
|
|
|
(323,069
|
)
|
Prepaid
expenses and other
|
|
|
5,360
|
|
|
(62,252
|
)
|
Other
assets
|
|
|
(16,840
|
)
|
|
-
|
|
Wholesale
line of credit
|
|
|
-
|
|
|
(926,201
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(13,656
|
)
|
|
(377,715
|
)
|
Deferred
service obligations and revenue
|
|
|
50,382
|
|
|
73,564
|
|
Liabilities
of discontinued operations
|
|
|
(125,000
|
)
|
|
-
|
|
Customer
deposits
|
|
|
(1,476
|
)
|
|
265,249
|
|
Net
cash flows from operating activities
|
|
|
(192,717
|
)
|
|
(2,652,913
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(362,006
|
)
|
|
(141,150
|
)
|
Purchase
of intangible assets
|
|
|
(10,750
|
)
|
|
(120,000
|
)
|
Purchase
of Ultravision
|
|
|
-
|
|
|
(287,050
|
)
|
Proceeds
from sale of business segment
|
|
|
-
|
|
|
1,682,184
|
|
Collections
on notes receivable
|
|
|
1,206
|
|
|
-
|
|
Net
cash flows from investing activities
|
|
|
(371,550
|
)
|
|
1,133,984
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Checks
issued in excess of cash in bank
|
|
|
(93,005
|
)
|
|
1,003
|
|
Payments
on short-term debt
|
|
|
-
|
|
|
(2,295,000
|
)
|
Payments
on long-term debt
|
|
|
(246,302
|
)
|
|
(2,064,077
|
)
|
Payments
on capital lease obligations
|
|
|
(36,713
|
)
|
|
(27,079
|
)
|
Payments
on note payable to stockholder
|
|
|
(2,837
|
)
|
|
(51,964
|
)
|
Payments
on mandatory redeemable preferred stock
|
|
|
(53,334
|
)
|
|
-
|
|
Proceeds
from issuance of stock and warrants
|
|
|
-
|
|
|
11,116,458
|
|
Payments
received on stock subscriptions receivable
|
|
|
6,000
|
|
|
66,399
|
|
Redemption
of preferred stock
|
|
|
(4,600
|
)
|
|
(800
|
)
|
Preferred
stock dividends
|
|
|
(22,829
|
)
|
|
(24,455
|
)
|
Exercise
of stock options
|
|
|
18,000
|
|
|
-
|
|
Net
cash flows from financing activities
|
|
|
(435,620
|
)
|
|
6,720,485
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(999,887
|
)
|
|
5,201,556
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
3,100,427
|
|
|
726,553
|
|
End
of period
|
|
$
|
2,100,540
|
|
$
|
5,928,109
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for interest, net of amortization of original issue
discount
|
|
$
|
132,433
|
|
$
|
255,060
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Note
receivable recorded on sale of discontinued operations
|
|
$
|
-
|
|
$
|
339,051
|
|
Conversion
of preferred stock and accrued dividends into common stock
|
|
|
-
|
|
|
673,335
|
|
Current
liabilities converted to common stock
|
|
|
-
|
|
|
10,603
|
|
Conversion
of notes payable into common stock
|
|
|
-
|
|
|
548,001
|
|
Conversion
of accrued dividends into common stock
|
|
|
16,667
|
|
|
94,748
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Note
1 - Unaudited Consolidated Financial Statements
The
information furnished in this report is unaudited and reflects all adjustments
which are normal recurring adjustments and, which in the opinion of management,
are necessary to fairly present the operating results for the interim periods.
The operating results for the interim periods presented are not necessarily
indicative of the operating results to be expected for the full fiscal year.
The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005,
previously filed with the Securities and Exchange Commission.
NOTE
2 - Summary of Significant Accounting Policies
Nature
of Business
Multiband
Corporation and subsidiaries (the Company) was incorporated in Minnesota in
September 1975. The Company provides voice, data and video services to
multi-dwelling unit customers. The Company's products and services are sold
to
customers located throughout the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern that contemplates the realization
of
assets and satisfaction of liabilities in the normal course of business. For
the
three months ended March 31, 2006 and 2005, the Company incurred net losses
of
$2,188,206 and $2,583,208, respectively. At March 31, 2006, the Company had
an
accumulated deficit of $57,983,150. The Company's ability to continue as a
going
concern is dependent on it ultimately achieving profitability and/or raising
additional capital. Management intends to obtain additional debt or equity
capital to meet all of its existing cash obligations and fund commitments on
planned Multiband projects; however, there can be no assurance that the sources
will be available or available on terms favorable to the Company. Management
anticipates that the impact of the actions listed below will generate sufficient
cash flows to pay current liabilities, long-term debt and capital lease
obligations and fund the Company's future operations:
1. |
Continued
reduction of operating expenses by controlling payroll, professional
fees
and other general and administrative
expenses.
|
2. |
Continue
to market Multiband services and obtain additional multi-dwelling
unit
customers.
|
3. |
Control
capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment program or by financing equipment
build-outs through a leasing
program.
|
4. |
Establish
market for wireless internet
services.
|
5. |
Solicit
additional equity investment in the Company by either issuing preferred
or
common stock.
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of Multiband Corporation
(MB) and its wholly owned subsidiaries, Corporate Technologies, USA, Inc. (CTU),
URON Inc.(URON), Multiband USA, Inc. (MB USA), Minnesota Digital, Inc. (MDU),
Rainbow Satellite Group, LLC (Rainbow) and Multiband Subscriber Services, Inc.
(Multiband) which provides voice, data and video services to residential
multi-dwelling units. All significant intercompany transactions and balances
have been eliminated in consolidation.
On
January 1, 2004, the Company merged Multiband into CTU. On April 1, 2005, the
continuing operations of CTU terminated (see Note 8.)
Discontinued
Operations
During
the first quarter of 2005, the Company sold certain assets and transferred
certain liabilities related to its Multiband Business Services (a/k/a CTU).
In
accordance with appropriate accounting rules, the Company reclassified the
previously reported financial results to exclude the results of the Multiband
Business Services and these results are presented on a historical basis as
a
separate line in the consolidated statements of operations and the consolidated
balance sheets entitled “Discontinued Operations”. All of the financial
information in the consolidated financial statements and notes to the
consolidated financial statements has been revised to reflect only the results
of continuing operations (see Note 8).
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Revenues
and Cost Recognition
The
Company recognizes revenue in accordance with the Securities Exchange
Commission’s Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”,
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectibility is reasonable assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue (included in discontinued operations) as products are shipped
based on FOB shipping point terms when title passes to customers.
The
Company earns revenues from six sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed
4)
Multiband user charges to multiple dwelling units 5) MB USA user charges to
timeshares, and 6) MDU earns revenue primarily through the activation of and
residual fees on video programming services.
Revenues
from video and computer technology products, which are sold but not installed,
are recognized when delivered and the customer has accepted the terms and has
the ability to fulfill the terms. Product returns and customer discounts are
netted against revenues. This revenue has been included with discontinued
operations.
Customers
contract for both the purchase and installation of voice and data networking
technology products and certain video technologies products on one sales
agreement, as installation of the product is essential to the functionality
of
the product. Revenue is recognized when the products are delivered and installed
and the customer has accepted the terms and has the ability to fulfill the
terms. This revenue has been included with discontinued operations. Service
revenues related to technology products including consulting, training and
support are recognized when the services are provided. Service revenues
accounted for less than 10% of total revenues for the three months ended March
31, 2006 and 2005. The Company, if the customer elects, enters into equipment
maintenance agreements for products sold once the original manufacturer's
warranty has expired. Revenues from all equipment maintenance agreements are
recognized on a straight-line basis over the terms of each contract. Costs
for
services are expensed as incurred. This revenue has been included with
discontinued operations.
Revenue
generated from activation on video programming services is earned in the month
of activation. According to the Company's agreement with DirecTV, in the event
that a customer cancels within the first 12 months of service, DirecTV has
the
right to chargeback the Company for a portion of the activation fees received.
In accordance with Securities Exchange Commission SAB 104, the Company has
estimated the potential charge back of commissions received on activation fees
during the past 12 months based on historical percentages of customer
cancellations and has included that amount as a reduction of revenue. Residual
income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services
and a variable amount depending on the number of activations in a given month.
The Company’s master system operator contract with DirecTV also permits the
Company to earn revenues through its control of other system operators who
are
unable to provide DirecTV video programming services without the Company’s
performance.
The
Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards
Board
Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as
a Principal versus Net as an Agent”. EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such
expenses.
The
Company reports the aforementioned voice, data, and video revenues on a gross
basis based on the following factors: the Company has the primary obligation
in
the arrangement with its customers; the Company controls the pricing of its
services; the Company performs customer service for the agreements; the Company
approves customers; and the Company assumes the risk of payment for services
provided. The Company reports DirecTV revenue on a net basis.
Multiband,
Rainbow, MDU and MB USA user charges are recognized as revenues in the period
the related services are provided in accordance with SAB 104. Any amounts billed
prior to services being provided are reported as deferred service obligations
and revenues.
Warranty
costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Cash
and Cash Equivalents
The
Company includes as cash equivalents, investments with original maturities
of
three months or less when purchased, which are readily convertible into known
amounts of cash. The Company deposits its cash in high credit quality financial
institutions. The balances, at times, may exceed federally insured
limits.
Goodwill
and Other Intangible Assets
Impairment
of Goodwill
We
periodically evaluate acquired businesses for potential impairment indicators.
Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that impairment indicators
exist and that goodwill associated with our acquired businesses is impaired.
Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. Goodwill related to continuing operations
was $954,871 at both March 31, 2006 and December 31, 2005.
Components
of intangible assets are as follows:
|
|
|
March
31, 2006
|
|
|
December
31, 2005
|
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain
name
|
|
$
|
83,750
|
|
$
|
76,771
|
|
$
|
83,750
|
|
$
|
72,583
|
|
Right
of entry contracts
|
|
|
9,139,778
|
|
|
2,724,579
|
|
|
9,129,028
|
|
|
2,300,664
|
|
Subscriber
lists
|
|
|
10,151,809
|
|
|
3,662,558
|
|
|
10,151,809
|
|
|
3,261,483
|
|
Debt
issuance costs
|
|
|
499,837
|
|
|
349,542
|
|
|
499,837
|
|
|
306,152
|
|
Total
|
|
$
|
19,875,174
|
|
$
|
6,813,450
|
|
$
|
19,864,424
|
|
$
|
5,940,882
|
|
Intangible
assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
954,871
|
|
$
|
-
|
|
$
|
954,871
|
|
$
|
-
|
|
The
Company amortizes a domain name over its estimated useful life of five years
using the straight-line method. The Company amortizes the right of entry
contracts and subscriber lists, over their estimated useful lives ranging from
24 to 120 months. Debt issuance costs are amortized over the life of the loan
of
approximately three years using the straight-line method, which approximates
the
interest method.
Amortization
of intangible assets was $872,568 and $865,123 for the three months ended March
31, 2006 and 2005, respectively. Amortization of debt issuance costs of $43,390
and $65,312 for the three months ended March 31, 2006 and 2005, respectively,
is
included in interest expense. Estimated amortization expense of intangible
assets for the years ending December 31, 2006, 2007, 2008, 2009, 2010 and 2011
is $3,471,792, $3,206,869, $3,023,563, $2,897,993, $1,106,176 and $54,266,
respectively. The weighted average remaining life of the intangibles is 5.4
years with right of entry average life of 6.5 years and subscriber lists average
life of 2.5 years.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R Accounting
for Stock-Based Compensation
(SFAS
123R), which requires companies to measure and recognize compensation expense
for all stock-based payments at fair value. SFAS 123R is being applied on the
modified prospective transition method and therefore the Company has not
restated results for prior periods. The financial statements for the three
months ended March 31, 2006 recognize compensation cost for the portion of
outstanding awards which have vested during the period. The Company recognizes
stock-based compensation
costs on a straight-line basis over the requisite service period of the award,
which is generally the option vesting term. For the three months ended
March 31, 2006, total stock-based compensation expense of $316,763
($.01
per
share) was included in selling, general and administrative
expenses.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
The
following table illustrates the effect on net loss and net loss per share if
the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation,
to its
stock-based employee compensation for the three months ended March 31,
2005.
|
|
|
Three
months ended March 31, 2005
|
|
Loss
attributable to common stockholders
|
|
$
|
(3,514,292
|
)
|
Pro
forma loss attributable to common stockholders
|
|
|
(3,814,386
|
)
|
Basic
and diluted loss attributable to common stockholders:
|
|
|
|
|
As
reported
|
|
$
|
(.13
|
)
|
Pro
forma loss attributable to common stockholders
|
|
|
(.14
|
)
|
Stock-based
compensation:
|
|
|
|
|
As
reported
|
|
$
|
0
|
|
Pro
forma
|
|
|
300,094
|
|
In
determining the compensation cost of the options granted during the three months
ended March 31, 2006 and 2005, as specified by SFAS No. 123, the fair value
of
each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used
in
these calculations are summarized as follows:
|
|
|
Three
months ended March
31, 2006
|
|
|
Three
months ended March
31, 2005
|
|
Risk-free
interest rate
|
|
|
4.50%
|
|
|
3.38%
|
|
Expected
life of options granted
|
|
|
10
Years
|
|
|
10
Years
|
|
Expected
volatility range
|
|
|
214%
|
|
|
203%
|
|
Expected
dividend yield
|
|
|
0%
|
|
|
0%
|
|
The
Company uses the Black-Scholes option-pricing model (Black-Scholes model) for
the Company’s pro forma information required under SFAS 123 and stock based
compensation expense recognized under SFAS 123(R). The Company’s determination
of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of variables. These variables include, but are
not limited to the Company’s expected stock price volatility, and actual and
projected stock option exercise behaviors and forfeitures.
Net
Loss per Common Share
Basic
net
loss per common share is computed by dividing the loss attributable to common
stockholders by the weighted average number of common shares outstanding for
the
reporting period. Diluted net loss per common share is computed by dividing
loss
attributable to common stockholders by the sum of the weighted average number
of
common shares outstanding plus all additional common stock that would have
been
outstanding if potentially dilutive common shares related to common share
equivalents (stock options, stock warrants, convertible preferred shares, and
issued but not outstanding restricted stock) had been issued. All options,
warrants, convertible preferred shares, and restricted stock outstanding during
the three months ended March 31, 2006 and 2005 were excluded from the
calculation as their effects were anti-dilutive.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Segment
Reporting
A
business segment is a distinguishable component of an enterprise that is engaged
in providing an individual product or service or a group of related products
or
services and that is subject to risks and returns that are different from those
of other business segments. Management believes that the Company has two
operating segments: 1) MCS, which acts as a principal in billing voice, data
and
cable revenues to subscribers; and 2) MDU, Inc. which collects net revenue
from
DirecTV.
Reclassifications
Certain
accounts in the prior quarters' consolidated financial statements have been
reclassified for comparative purposes to conform to the presentation in the
current quarter consolidated financial statements. These reclassifications
had
no effect on net loss or stockholders' equity.
NOTE
3 - Business Acquisitions
Effective
April 1, 2005, the Company purchased certain video assets (equipment and
video
subscribers) from Ultravision, Inc. for $287,050 cash including a finder’s fee
of $12,050.
On
August
26, 2005, the Company completed its acquisition of certain assets of Dinamo
Entertainment, Inc. for $2,074,225, $652,500 of which was paid for in Company
stock, valued at $1.50 per share (as negotiated between buyer and seller),
$475,000 of which was paid for in cash, and the remaining balance of $600,000
as
a note payable to the former owner payable in monthly payments of $14,091
including interest at 6% with a balloon payment of $317,933 due in November
2007. The note is collateralized by the sellers assets acquired as part of
the
purchase. The Company also assumed debt of $170,200 of which $75,000 in cash
was
paid at closing and 40,000 shares of Company stock were issued at fair market
value of $50,000 to the debtor. The Company has assumed the lease payments
for
the remaining balance of $45,200. The Company assumed monthly payments on the
remaining $45,200 balance outstanding related to ceased equipment. The Company
has agreed to repurchase the 40,000 shares one year from closing if the fair
market value in the 5 consecutive trading days immediately subsequent to the
one
year period falls below $1.25. In connection with the acquisition, the Company
incurred a $176,525 finder’s fee paid in cash at closing. The consideration paid
was based on the Company’s analysis of the value of the acquired video equipment
and related video subscribers totaling about 3,000.
|
|
|
Dinamo
|
|
Allocation
of Purchase Price:
|
|
|
|
|
|
|
|
|
|
Total
Cash/Stock/Notes Payable Consideration
|
|
$
|
1,727,500
|
|
Add:
Transaction Costs
|
|
|
176,525
|
|
Add:
Liabilities assumed
|
|
|
170,200
|
|
Total
Consideration
|
|
|
2,074,225
|
|
Less:
Tangible assets
|
|
|
1,450,000
|
|
Less:
Goodwill
|
|
|
150,000
|
|
|
|
|
|
|
Intangible
assets
|
|
$
|
474,225
|
|
Effective
September 30, 2005, the Company sold certain video subscriber assets located
in
Ohio, Oklahoma and Texas to Satellite Broadcasting Corporation (SBC). The
Company sold 152 video subscribers for $167,000; $91,500 in cash and the balance
in a three year note. Terms of this note include variable monthly payments
at 7%
with a balloon payment in October 2008. Effective the same date, the Company
purchased approximately 550 video subscribers in Minnesota from SBC for a total
purchase price of $420,125, paid as follows: $200,000 cash at closing; $105,000
in Company common stock valued at $1.50 per share (as negotiated by buyer and
seller); and the assumption of a capital lease obligation. Terms of this capital
lease obligation include monthly payments of $3,223 including interest at 7%
through November 2008 and are collateralized by assets purchased. Included
in
the purchase price is $10,125 related to a finder’s fee. The purchase price was
allocated to the acquired assets based on the estimated fair values as of the
acquisition date. The Company allocated the purchase price to intangibles of
a
right of entry contracts with a value of $315,125 and equipment of $105,000.
The
rights of entry contract will be amortized over its estimated useful life of
108
months.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
The
unaudited pro forma results of operations for the three months ended March
31,
2005 as a result of the SBC, Ultravision, and Dinamo acquisitions of video
subscribers and video equipment is not material to the historical financial
statements.
NOTE
4 - Stockholder Equity
Stock
warrants activity is as follows for the three months ended March 31,
2006:
|
|
|
Number
of Warrants
|
|
|
Weighted
- Average Exercise Price
|
|
Outstanding,
December 31, 2005
|
|
|
18,715,979
|
|
$
|
1.68
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled/Expired
|
|
|
(375,000
|
)
|
|
(4.00
|
)
|
Outstanding,
March 31, 2006
|
|
|
18,340,979
|
|
$
|
1.63
|
|
No
warrants were granted during the quarter ended March 31, 2006.
NOTE
5 - Accrued Liabilities
Accrued
liabilities consisted of the following:
|
|
|
March
31, 2006
|
|
|
December
31, 2005
|
|
Payroll
and related taxes
|
|
$
|
428,374
|
|
$
|
391,707
|
|
Accrued
preferred stock dividends
|
|
|
730,146
|
|
|
506,535
|
|
Accrued
liability-vendor charge backs
|
|
|
1,347,673
|
|
|
1,347,673
|
|
Other
|
|
|
354,647
|
|
|
495,139
|
|
Total
|
|
$
|
2,860,840
|
|
$
|
2,741,054
|
|
NOTE
6 - Business Segments
The
Company has the following business segments. Multiband Corp. includes corporate
expenses (e.g. corporate administrative costs), interest income, interest
expense, depreciation and amortization. The MDU segment represents results
as
the master service operator for DirecTV. The MCS segment provides voice, data
and video services to residential multi-dwelling units as the principal to
subscribers. The discontinued operations segment includes the Multiband Business
Services segment which was sold effective after the close of business March
31,
2005 (see Note 8).
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Segment
disclosures are as follows:
|
|
|
Multiband
Corp.
|
|
|
MDU
|
|
|
MCS
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
Three
months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
2,512,172
|
|
$
|
1,891,872
|
|
$
|
-
|
|
$
|
4,404,044
|
|
Income
(loss) from operations
|
|
|
(1,144,181
|
)
|
|
904,943
|
|
|
(1,687,924
|
)
|
|
-
|
|
|
(1,927,162
|
)
|
Total
assets
|
|
|
4,455,981
|
|
|
7,578,677
|
|
|
12,090,163
|
|
|
-
|
|
|
24,124,821
|
|
Depreciation
and amortization
|
|
|
59,797
|
|
|
401,076
|
|
|
841,583
|
|
|
-
|
|
|
1,302,456
|
|
Capital
expenditures
|
|
|
23,809
|
|
|
-
|
|
|
338,197
|
|
|
-
|
|
|
362,006
|
|
|
|
|
Multiband
Corp.
|
|
|
MDU
|
|
|
MCS
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
Three
months ended March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
1,911,505
|
|
$
|
1,795,371
|
|
$
|
-
|
|
$
|
3,706,876
|
|
Income
(loss) from operations
|
|
|
(560,301
|
)
|
|
352,083
|
|
|
(1,252,953
|
)
|
|
-
|
|
|
(1,461,171
|
)
|
Total
assets
|
|
|
9,653,316
|
|
|
9,377,707
|
|
|
12,390,479
|
|
|
-
|
|
|
31,421,502
|
|
Depreciation
and amortization
|
|
|
7,843
|
|
|
401,079
|
|
|
739,945
|
|
|
-
|
|
|
1,148,867
|
|
Capital
expenditures
|
|
|
-
|
|
|
-
|
|
|
102,792
|
|
|
38,358
|
|
|
141,150
|
|
Segment
disclosures are provided by entity to the extent practicable under the Company's
accounting system. Depreciation and amortization above does not include
depreciation and amortization related to discontinued operations. The cash
flow
statements presentation of depreciation and amortization includes the
depreciation and amortization from discontinued operations.
NOTE
7 - Commitments and Contingencies
Legal
Proceedings
The
Company is involved in legal actions in the ordinary course of its business.
As
of March 31, 2006, management believes that there are no pending legal
proceedings against or involving the Company for which the outcome is likely
to
have a material adverse effect upon the Company’s consolidated financial
position, results of operations, or cash flows.
Significant
Relationship
The
Company is a master agent for DirecTV pursuant to a system operator agreement
with DirecTV dated August, 2005. The initial term of the agreement is for three
years and provides for two additional two-year renewals if the Company has
a
minimum number of paying video subscribers in its system operator network.
Termination of the Company's DirecTV agreement would have a material adverse
impact on the Company's on-going operations. Revenues generated from
DirecTV were 57.0% and 51.6% of total revenue for the three months ended March
31, 2006 and 2005, respectively.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
Guaranty
On
March
1, 2006, Corporate Technologies, LLC (CTLLC), a subsidiary of North Central
Equity, LLC, the purchaser of the MBS business segment, signed a lease with
Lexstar Tower I Limited Partnership whereby CTLLC assumed the lease obligation
for substantially all of the first floor space the Company is renting in Fargo,
North Dakota for the period beginning March 1, 2006 to February 28, 2011.
Pursuant to the aforementioned lease, the Company entered into a guaranty
whereby the Company, in the event of a default or early termination of the
lease
by CTLLC, is obligated to perform CTLLC’s lease obligation during months 43-60
of the lease. The Company remains obligated to provide free rent to CTLLC
through March 31, 2007 as defined in the purchase agreement of MBS (see Note
8).
This guaranty has no effect on the Company’s consolidated financial statements
for the period ended March 31, 2006. However, should Multiband eventually have
to perform on the guaranty in the future, it could be liable for $348,881 worth
of rent payments plus any associated charges such as property taxes and common
area maintenance.
NOTE
8 - Sale of Multiband Business Services segment
After
the
close of business on March 31, 2005, the Company completed the sale of certain
assets and liabilities relating to its Multiband Business Services (MBS,
a/k/a
Corporate Technologies USA) division. The buyer was North Central Equity
LLC
(“Buyer”).
The
original purchase price paid by the Buyer was $2,550,000 which consisted
of
$1,682,184 in cash at closing, $349,817 in assumed vacation pay and warranty
liabilities, and the balance of $517,999 in the original note receivable
at 7%
interest due on December 31, 2005. The amount of the note receivable was
subject
to adjustment based on certain representations and warranties and estimated
presale customer service obligations the Buyer assumed liability for in the
purchase agreement. Due to the aforementioned representations and warranties
and
estimated liabilities, the Company, at the notes inception established a
reserve
of $178,948 against the collectibility of the note receivable. In November
2005,
the note was paid by the buyer in the amount of $400,000 which included the
net
adjustment for the actual amount of presale customer service obligations.
The
Company’s gain on sale was increased $149,865 accordingly as of September 30,
2005 to reflect this prepayment and the resolution of estimated assumed
liabilities.
In
connection with the purchase agreement, the Company entered into an interim
services agreement whereby the Buyer is able to sublease space at no charge
at
the Company’s Minneapolis and Fargo locations and obtain access to certain
aspects of the Company’s information technology resources for one year. Services
provided will be charged by either party at fair value and is estimated by
management to be insignificant. In addition, the services agreement is explicit
that the Company has no control over the buyer’s operations. The buyer also
receives additional free rent for a second year due to the results of a post
closing inventory appraisal (see Note 7).
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
The
gain
on sale of MBS business services segment is as follows as adjusted at December
31, 2005:
Sale
Price
|
|
|
|
|
|
|
|
Cash
proceeds
|
|
|
|
|
$ |
1,682,184 |
|
Note
receivable
|
|
|
|
|
|
400,000 |
|
Assumed
liabilities
|
|
|
|
|
|
438,868 |
|
Total
sale price
|
|
|
|
|
|
2,521,052 |
|
|
|
|
|
|
|
|
|
Assets
sold
|
|
|
|
|
|
|
|
Inventory,
net of reserve
|
|
|
|
|
|
1,045,110
|
|
Property
and equipment
|
|
|
|
|
|
52,351
|
|
Net
assets sold
|
|
|
|
|
|
1,097,461
|
|
Less
costs and expenses
|
|
|
|
|
|
|
|
Broker’s
fee
|
|
|
|
|
|
122,500
|
|
Other
selling expense
|
|
|
|
|
|
10,135
|
|
Sublease
for one year at no charge
|
|
|
|
|
|
500,000
|
|
Additional
free rent related to inventory adjustment
|
|
|
|
|
|
500,000
|
|
Legal
and accounting costs
|
|
|
|
|
|
37,600
|
|
Total
costs
|
|
|
|
|
|
1,170,235
|
|
Net
gain on sale
|
|
|
|
|
$
|
253,356
|
|
The
following are condensed statements of operations of the discontinued operations
for the three months ended March 31:
Statement
of Operations
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
$
|
-
|
|
$
|
3,684,875
|
|
Cost
of sales
|
|
|
-
|
|
|
2,712,781
|
|
Selling,
general and administrative
|
|
|
(2,200
|
)
|
|
1,414,410
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
56,188
|
|
Income
(loss) from operations
|
|
|
2,200
|
|
|
(498,504
|
)
|
Other
income (expense)
|
|
|
-
|
|
|
(46,255
|
)
|
Net
income (loss)
|
|
|
2,200
|
|
|
(544,759
|
)
|
Gain
on sale
|
|
|
-
|
|
|
103,491
|
|
Income
(loss) from discontinued operations
|
|
$
|
2,200
|
|
$
|
(441,268
|
)
|
The
Company has recorded $1 million in deferred rent liability in relation to
the
sale of the MBS business segment. This liability is amortized over the 24
month
term of the sublease. Amortization has been netted with rent expense and
the
resulting income of $16,100 is included in other income (expense) included
in
continuing operations for the three months ended March 31, 2006.
NOTE
9 - Subsequent Events
As
of May
1, 2006, certain Multiband shareholders of record and certain contingent
rights
holders became eligible for a distribution of URON common stock based on
the
holder’s ownership of Multiband shares or rights as of that date. The holders
will receive .05 shares of URON common stock for each share or right to a
share
of Multiband common stock held on the record date.
In
May
2006, 25,000 shares of Class I preferred stock with a value of $2.5 million
were
converted into 1,666,667 shares of common stock.
FORWARD-LOOKING
STATEMENTS
From
time
to time, the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, product
pricing, management for growth, integration of acquisitions, technological
developments, new products, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements including those made in this statement. In order to comply with
the
terms of the Private Securities Litigation Reform Act, the Company notes
that a
variety of factors could cause the Company's actual results and experience
to
differ materially from the anticipated results or Company's forward-looking
statements.
The
risks
and uncertainties that may affect the operations, performance, developments
and
results of the Company's business include the following: national and regional
economic conditions; pending and future legislation affecting IT and
telecommunications industries; market acceptance of the Company's products
and
services; the Company's products and services; the Company's continued ability
to provide integrated communication solutions for customers in a dynamic
industry; and other competitive factors.
Because
these and other factors could affect the Company's operating results, past
financial performance should not necessarily be considered as a reliable
indicator of future performance and anticipated future period results.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATION
OUR
COMPANY
Multiband
Corporation (Multiband), is a Minnesota corporation formed in
September 1975. Multiband has two operating segments: 1) Multiband Consumer
Services (MCS, legally known as Multiband Subscriber Services, Inc.), which
encompasses the subsidiary corporations, Multiband USA, Inc., URON, Inc.,
and
Rainbow Satellite Group, LLC;
and
2)
Minnesota Digital Universe, Inc. (MDU).
Multiband
completed an initial public offering in June 1984. In November 1992,
Multiband became a non-reporting company under the Securities Exchange Act
of
1934. In July 2000, Multiband regained its reporting company status. In
December, 2000, Multiband stock began trading on the NASDAQ stock exchange
under
the symbol VICM. In July 2004, the symbol was changed to MBND concurrent
with
the Company’s name change from Vicom, Incorporated to Multiband
Corporation.
Multiband’s
website is located at:
www.multibandusa.com.
From
its
inception until December 31, 1998, Multiband operated as a telephone
interconnect company only. Effective December 31, 1998, Multiband acquired
the assets of the Midwest region of Enstar Networking Corporation (ENC),
a data
cabling and networking company. In late 1999, in the context of a forward
triangular merger, Multiband to expand its range of computer products and
related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (MBS). MBS provided voice,
data and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. All references to financial
information and descriptions of business in this registration have been revised
to reflect only our continuing operations and all references to our now
discontinued Multiband Business Services have been eliminated from the
Management's Discussion and Analysis of Financial Condition and Results of
Operation. MCS segment began in February 2000. MCS, the Company’s continuing
operating division, provides voice, data and video services to multiple dwelling
units (MDU), including apartment buildings, condominiums and time share resorts.
During 2004, the Company purchased video subscribers in a number of separate
transactions, the largest one being Rainbow Satellite Group, LLC. During
2004,
the Company also purchased the stock of Minnesota Digital Universe, Inc.,
(MDU
segment) which made the Company the largest master service operator in MDU’s for
DirecTV satellite television in the United States.
At
March
31, 2006, MCS had 42,167 subscriptions for its services (1,341 voice
subscriptions, 36,673 video subscriptions and 4,153 internet subscriptions).
At
March 31, 2006, MDU had approximately 75,331 video subscriptions managed
through
its network of system operators.
SELECTED
CONSOLIDATED FINANCIAL DATA
|
DOLLAR
AMOUNTS AS A PERCENTAGE OF REVENUES
|
|
THREE
MONTHS ENDED
|
|
|
|
|
|
March
31, 2006
(unaudited)
|
|
March
31, 2005 (unaudited)
|
REVENUES
|
100%
|
|
100%
|
|
|
|
|
COST
OF PRODUCTS & SERVICES (Exclusive of depreciation and amortization
shown below)
|
46.7%
|
|
50.7%
|
|
|
|
|
SELLING,
GENERAL & ADMINISTRATIVE
|
67.5%
|
|
57.9%
|
DEPRECIATION
& AMORTIZATION
|
29.5%
|
|
31.0%
|
|
|
|
|
LOSS
FROM OPERATIONS
|
-43.7%
|
|
-39.6%
|
INTEREST
EXPENSE & OTHER, NET
|
-6.0%
|
|
-18.2%
|
LOSS
FROM CONTINUING OPERATIONS
|
-49.7%
|
|
-57.8%
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
-
|
|
-11.9%
|
NET
LOSS
|
-49.7%
|
|
-69.7%
|
RESULTS
OF OPERATIONS
Revenues
Total
revenues increased 18.8% to $4,404,044 for the quarter ended March 31, 2006
as
compared to $3,706,876 for the quarter ended March 31, 2005. This increase
is
primarily due to an increase in agent fees and revenue generating subscriptions
during the comparable periods. The Company expects revenues to continue to
increase in 2006 over 2005 as the Company adds additional services and thus
additional revenue generating subscriptions to new and existing
properties.
Revenues
in the first quarter of fiscal year 2006, for the MCS segment, increased
5.4% to
$1,891,872 as compared to $1,795,371 in the first quarter of fiscal 2005.
This
increase is primarily due to an increase in revenue generating subscriptions
during the comparable periods.
Revenues
in the first quarter of 2006 for the MDU segment increased 34.6% to
$2,512,172 as compared to $1,911,505 in the first quarter of fiscal 2005.
This
increase is primarily due to the number of managed subscribers and a related
increase in agent fees during the comparable period.
Cost
of Products and Services (Exclusive of depreciation and
amortization)
The
Company's cost of products and services, exclusive of depreciation and
amortization, increased by 9.8% to $2,056,527 for the quarter ended March
31,
2006 as compared to $1,872,268 for the similar quarter last year. Costs of
products and services for the MCS segment for the quarter were $1,011,436
compared to $916,032 in the same quarter last year, a 10.4% increase. Costs
of
products and services for the MDU segment for the quarter were $1,045,091
compared to $956,236 in the same quarter last year, a 9.3% increase. The
increase in costs of services in both segments is directly related to the
increase in services revenues. The Company anticipates that, on a percentage
basis, revenues throughout 2006 will increase slightly ahead of costs due
to the
expectation that customer penetrations in given properties will grow as
additional services are added to those properties. The Company’s past operating
performance indicates that performance on a property level improves when
the
Company offers two or three services at a property versus a single
service.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased 38.4% to $2,972,223 in the
quarter
ended March 31, 2006, compared to $2,146,912 in the prior year quarter. Selling,
general and administrative expenses were, as a percentage of revenues, 67.5%
for
the quarter ended March 31, 2006 and 57.9% for the similar period a year
ago.
This increase is primarily a result of increased expenses related to an increase
in revenue and due to stock option expense of $316,763 required to be recognized
in the current quarter versus $0 stock option in expense in the comparable
period. The Company anticipates that selling, general and administrative
expenses, exclusive of stock option expenses, will remain relatively constant
in
future periods as the Company has now largely integrated various billing
and
customer service activities related to its acquisitions in 2004 and
2005.
Interest
Expense
Interest
expense was $304,681 for the quarter ended March 31, 2006, versus $685,701
for
the similar period a year ago, primarily reflecting a decrease in the Company’s
debt and original issue discount expense. Amortization of original issue
discount was $114,908 and $500,098 for the three months ended March 31, 2006
and
2005.
Loss
from Operations
The
Company, in the first quarter of 2006, incurred a loss from operations for
its
combined operating business segments of $1,927,162 versus a loss of $1,461,171
during the prior year’s period. The MDU segment showed a profit from operations
of $904,943 during the first quarter of 2006 versus profits of $352,083 for
the
three months ended March 31, 2005. For the first quarter of 2006, the MCS
segment showed a loss from operations of $1,687,924 versus a loss of $1,252,953
for the prior year period. The Multiband Corporation segment, which has no
revenues, showed a loss from operations of $1,144,181 for the three months
ended
March 31, 2006 versus a loss of $560,301 for the same period last
year.
Net
Loss
In
the
first quarter of fiscal 2006, the Company incurred a net loss of $2,188,206
compared to a net loss
of
$2,583,208 for the first fiscal quarter of 2005.
Liquidity
and Capital Resources
During
the three months ended March 31, 2006 and 2005, the Company recorded a net
loss
of $2,188,206 and $2,583,208, respectively. Net cash used by operations during
the three months ended March 31, 2006 was $192,717 as compared to cash used
by
operations during the three months ended March 31, 2005 of $2,652,913. Operating
cash flows improved significantly during the comparable periods. This
improvement in cash flows is primarily due to a reduction of accounts payable
and accrued liabilities and retirement of a wholesale line of credit for
the
three months ended March 31, 2005 related to the Company’s sale of the MBS
segment. Management believes that over the next 12 months there will be a
decrease in accrued liabilities and no significant change in accounts payable.
Principal payments on current long-term debt over the next 12 months is expected
to be $799,630.
Cash
and
cash equivalents totaled $2,100,540 at March 31, 2006 versus $3,100,427 at
December 31, 2005. Available working capital deficit for the three months
ended
March 31, 2006 increased to $2,381,920 as compared to $971,418, at December
31,
2005, primarily due to funds invested in project build-outs and the operating
loss for the quarter. Total debt was reduced in the three months ended March
31,
2006 as the Company continued to retire financing debt and debt related to
acquisitions. The Company had a material increase in accounts receivables
for
the period ended March 31, 2006 reflecting increased revenues over the
comparable quarter ended March 31, 2005. Net cash flows from investing
activities totaled ($371,550) compared to $1,133,984 for the comparable period
reflecting the sale of the MBS segment.
The
Company continues to experience growth, primarily due to increased subscribers
and recurring revenues acquired from the various transactions previously
mentioned herein.
Management
of Multiband believes that cash on hand, capital resources and cash from
operations as of March 31, 2006, will be adequate to meet the
anticipated liquidity and capital resource requirements of its business for
the
next 12 months.
Capital
Expenditures
The
Company used $362,006 for capital expenditures during the three months ended
March 31, 2006, as compared to $141,150 in the similar period last year.
Capital
expenditures consisted of project build-outs and equipment acquired for internal
use. We estimate capitalized expenditures for the remainder of 2006 will
be
approximately $500,000.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Impairment
of Long-Lived Assets
The
Company’s long-lived assets include property, equipment and leasehold
improvement. At March 31, 2006, the Company had net property and equipment
of
$5,235,877, which represents approximately 22% of the Company’s total assets.
The estimated fair value of these assets is dependent on the Company’s future
performance. In assessing for potential impairment for these assets, the
Company
considers future performance. If these forecasts are not met, the Company
may
have to record an impairment charge not previously recognized, which may
be
material. During the three months ended March 31, 2006 and 2005, the Company
did
not record any impairment losses related to long-lived assets.
Impairment
of Goodwill
We
periodically evaluate acquired businesses for potential impairment indicators.
Our judgments regarding the existence of impairment indicators are based
on
legal factors, market conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that impairment indicators
exist and that goodwill associated with our acquired businesses is impaired.
Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. During the three months ended March
31,
2006 and 2005, the Company did not record any impairment losses related to
goodwill.
Amortization
of Intangible Assets
The
Company amortizes a domain name over its estimated useful life of five years
using the straight-line method. The Company amortizes right of entry contracts
and subscriber lists over their estimated useful lives ranging from 24 to
120
months.
ITEM
3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Multiband
is not subject to any material interest rate risk as any current lending
agreements are at a fixed rate of interest except for the notes payable to
Laurus Master Fund, Ltd., which is three percent over the prime interest
rate
and the Convergent Capital note of $2,500,000, which varies from 11% to 14%,
dependent on the Company’s common stock price. Multiband also has variable rate
% of Class I convertible preferred stock which pays dividends on a basis
of
prime rate.
ITEM
4. CONTROLS AND PROCEDURES
As
of the
end of the period covered by this quarterly report, the Company carried out
an
evaluation, under the supervision and with the participation of the Company’s
management, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures are effective in alerting them in a timely basis
to
material information relating to the Company required to be disclosed in
the
Company’s periodic SEC reports. There have been no significant changes in the
Company’s internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
There was no change in the Company’s internal control over financial reporting
during the Company’s most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
As
of
March 31, 2006, Multiband was not engaged in any pending legal proceedings
where, in the opinion of the Company, the outcome is likely to have a material
adverse effect upon the business, operating results and financial condition
of
the Company.
ITEM
1A. RISK FACTORS
Our
operations and our securities are subject to a number of risks, including
but
not limited to those described below. If any of the following risks actually
occur, the business, financial condition or operating results of Multiband
and
the trading price or value of our common stock could be materially adversely
affected.
General
Multiband,
since 1998, has taken several significant steps to reinvent and reposition
itself to take advantage of opportunities presented by a shifting economy
and
industry environment.
Recognizing
that voice, data and video technologies in the late twentieth century were
beginning to systematically integrate as industry manufacturers were evolving
technological standards from "closed" proprietary networking architectures
to a
more "open" flexible and integrated approach, Multiband, between 1998 and
2001,
purchased three competitors which, in the aggregate, possessed expertise
in data
networking, voice and data cabling and video distribution technologies.
In
early
2000, Multiband created its MCS division, employing the aforementioned
expertise, to provide communications and entertainment services (local dial
tone, long distance, high-speed internet and expanded satellite television
services) to residents in MDUs on one billing platform, which the Company
developed internally.
The
specific risk factors, as detailed below, should be analyzed in the context
of
the Company's anticipated MCS related growth.
Net
Losses
The
Company had net losses of $2,188,206 for the three months ended March 31,
2006,
$7,475,000 for the year ended December 31, 2005, $9,783,962 for the year
ended
December 31, 2004. Multiband may never be profitable.
The
prolonged effects of generating losses without additional funding may restrict
our ability to pursue our business strategy. Unless our business plan is
successful, an investment in our common stock may result in a complete loss
of
an investor's capital.
If
we
cannot achieve profitability from operating activities, we may not be able
to
meet:
o our
capital expenditure objectives;
o our
debt
service obligations; or
o our
working capital needs.
Goodwill
In
June
2001, the Financial Accounting Standards Board (FASB) adopted Statement of
Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets" which changed the amortization rules on recorded goodwill from a
monthly
amortization to a periodic "impairment" analysis for fiscal years beginning
after December 15, 2001. As of December 31, 2005, the Company had remaining
recorded goodwill of $954,871 primarily related to the purchase of Rainbow
Satellite Group, LLC. and the purchase of certain assets of Dinamo
Entertainment, Inc. At March 31, 2006, the Company did not note any indications
of impairment related to goodwill.
Deregulation
Several
regulatory and judicial proceedings have recently concluded, are underway
or may
soon be commenced that address issues affecting operations and those of our
competitors, which may cause significant changes to our industry. We cannot
predict the outcome of these developments, nor can we assure you that these
changes will not have a material adverse effect on us. Historically, we have
been a reseller of products and services, not a manufacturer or carrier
requiring regulation of its activities. Pursuant to Minnesota statutes, our
Multiband activity is specifically exempt from the need to tariff our services
in MDU's. However, the Telecommunications Act of 1996 provides for significant
deregulation of the telecommunications industry, including the local
telecommunications and long-distance industries. This federal statute and
the
related regulations remain subject to judicial review and additional
rule-makings of the Federal Communications Commission, making it difficult
to
predict what effect the legislation will have on us, our operations, and
our
competitors.
Dependence
on Strategic Alliances
Several
suppliers or potential suppliers of Multiband, such as McLeod, WorldCom,
WS Net,
XO Communications and others have filed for bankruptcy in recent years. While
the financial distress of its suppliers or potential suppliers could have
a
material adverse effect on Multiband's business, Multiband believes that
enough
alternate suppliers exist to allow the Company to execute its business plans.
The Company is also highly dependent on its Master System Operator agreement
with DirecTV. The initial term of the agreement, which expires in August
2008,
is for three years and provides for two additional two-year renewals if the
Company has a minimum number of paying video subscribers in its system operator
network. Although an alternate provider of satellite television services,
Echostar, exists, the termination of its agreements with DirecTV could have
a
material adverse effect on Multiband's business.
Changes
in Technology
A
portion
of our projected future revenue is dependent on public acceptance of broadband
and expanded satellite television services. Acceptance of these services
is
partially dependent on the infrastructure of the internet and satellite
television which is beyond Multiband's control. In addition, newer technologies,
such as video-on-demand, are being developed which could have a material
adverse
effect on the Company's competitiveness in the marketplace if Multiband is
unable to adopt or deploy such technologies.
Attraction
and Retention of Employees
Multiband's
success depends on the continued employment of certain key personnel, including
executive officers. If Multiband were unable to continue to attract and retain
a
sufficient number of qualified key personnel, its business, operating results
and financial condition could be materially and adversely affected. In addition,
Multiband's success depends on its ability to attract, develop, motivate
and
retain highly skilled and educated professionals with a wide variety of
management, marketing, selling and technical capabilities. Competition for
such
personnel is intense and is expected to increase in the future.
Intellectual
Property Rights
Multiband
relies on a combination of trade secret, copyright, and trademark laws, license
agreements, and contractual arrangements with certain key employees to protect
its proprietary rights and the proprietary rights of third parties from which
Multiband licenses intellectual property. Multiband also relies on agreements
with owners of MDUs which grant the Company rights of access for a specific
period to MDU premises whereby Multiband is allowed to offer its voice, data,
and video services to individual residents of the MDUs. If it was determined
that Multiband infringed the intellectual property rights of others, it could
be
required to pay substantial damages or stop selling products and services
that
contain the infringing intellectual property, which could have a material
adverse effect on Multiband's business, financial condition and results of
operations. Also, there can be no assurance that Multiband would be able
to
develop non-infringing technology or that it could obtain a license on
commercially reasonable terms, or at all. Multiband's success depends in
part on
its ability to protect the proprietary and confidential aspects of its
technology and the products and services it sells. There can be no assurance
that the legal protections afforded to Multiband or the steps taken by Multiband
will be adequate to prevent misappropriation of Multiband's intellectual
property.
Variability
of Quarterly Operating Results
Variations
in Multiband's revenues and operating results occur from quarter to quarter
as a
result of a number of factors, including customer engagements commenced and
completed during a quarter, the number of business days in a quarter, employee
hiring and utilization rates, the ability of customers to terminate engagements
without penalty, the size and scope of assignments and general economic
conditions. Because a significant portion of Multiband's expenses are relatively
fixed, a variation in the number of customer projects or the timing of the
initiation or completion of projects could cause significant fluctuations
in
operating results from quarter to quarter.
Certain
Anti-Takeover Effects
Multiband
is subject to Minnesota statutes regulating business combinations and
restricting voting rights of certain persons acquiring shares of Multiband.
These anti-takeover statutes may render more difficult or tend to discourage
a
merger, tender offer or proxy contest, the assumption of control by a holder
of
a large block of Multiband's securities, or the removal of incumbent management.
Volatility
of Multiband's Common Stock
The
trading price of our common stock has been and is likely to be volatile.
The
stock market has experienced extreme volatility, and this volatility has
often
been unrelated to the operating performance of particular companies. We cannot
be sure that an active public market for our common stock will continue.
Investors may not be able to sell the common stock at or above the price
they
paid for their common stock, or at all. Prices for the common stock will
be
determined in the marketplace and may be influenced by many factors, including
variations in our financial results, changes in earnings estimates by industry
research analysts, investors' perceptions of us and general economic, industry
and market conditions.
Future
Sales of Our Common Stock May Lower Our Stock Price
If
our
existing shareholders sell a large number of shares of our common stock,
the
market price of the common stock could decline significantly. The perception
in
the public market that our existing shareholders might sell shares of common
stock could depress our market price.
Competition
We
face
competition from others who are competing for a share of the MDU market,
including other satellite companies, cable companies and telephone companies.
Some of these companies have significantly greater assets and resources than
we
do.
ITEM
6. EXHIBITS
31.1 |
Certification
of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
of the
Exchange Act.
|
31.2 |
Certification
of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
of the
Exchange Act.
|
32.1 |
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
32.2 |
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MULTIBAND
CORPORATION
Registrant
|
|
|
Date:
May 15, 2006
|
By:
|
/s/
James L. Mandel
Chief
Executive Officer
|
|
|
|
Date:
May 15, 2006
|
By:
|
/s/
Steven M. Bell
Chief
Executive Officer
(Principal
Financial and Accounting
Officer)
|