UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Quarterly Period ended September 30, 2006
Commission
File Number 000-51010
MOBILEPRO
CORP.
(Exact
name of registrant as specified in charter)
DELAWARE
|
|
87-0419571
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
6701
Democracy Boulevard, Suite 202, Bethesda, MD
|
|
20817
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
(301)
315-9040
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)
during the past 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 (check one) whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See the definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act:
Large
Accelerated Filer o
|
|
Accelerated
Filer x
|
|
Non-Accelerated
Filer o
|
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
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: As of November 6, 2006, the Company
had 585,776,202 outstanding shares of its common stock, $0.001 par value per
share.
TABLE
OF CONTENTS
ITEM
NUMBER AND CAPTION
|
|
PAGE
|
PART
I
|
|
|
|
|
|
|
|
ITEM
1.
|
|
FINANCIAL
STATEMENTS
|
3
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
8
|
ITEM
2.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
|
24
|
ITEM
3.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
54
|
ITEM
4
|
|
CONTROLS
AND PROCEDURES
|
54
|
|
|
|
|
PART
II
|
|
|
|
|
|
|
|
ITEM
1.
|
|
LEGAL
PROCEEDINGS
|
55
|
ITEM
2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
56
|
ITEM
3.
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
57
|
ITEM
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
57
|
ITEM
5.
|
|
OTHER
INFORMATION
|
57
|
ITEM
6.
|
|
EXHIBITS
|
57
|
PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2006 AND MARCH 31, 2006
ASSETS
|
|
|
|
|
|
|
|
September
30,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,283,118
|
|
$
|
5,397,881
|
|
Restricted
cash
|
|
|
1,110,235
|
|
|
352,200
|
|
Accounts
receivable, net
|
|
|
9,091,203
|
|
|
10,481,632
|
|
Prepaid
expenses and other current assets
|
|
|
3,337,363
|
|
|
3,399,864
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
16,821,919
|
|
|
19,631,577
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET OF ACCUMULATED DEPRECIATION
|
|
|
19,130,816
|
|
|
15,859,254
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill,
net of impairment
|
|
|
47,220,042
|
|
|
47,788,167
|
|
Customer
contracts and relationships, net of amortization
|
|
|
8,119,324
|
|
|
8,777,502
|
|
Deferred
financing fees, net of amortization
|
|
|
—
|
|
|
146,667
|
|
Other
assets
|
|
|
1,638,411
|
|
|
1,787,886
|
|
|
|
|
|
|
|
|
|
|
|
|
56,977,777
|
|
|
58,500,222
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
92,930,512
|
|
$
|
93,991,053
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2006 AND MARCH 31, 2006
(CONTINUED)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
September
30,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
portion of convertible debentures
|
|
$
|
13,712,421
|
|
$
|
4,500,000
|
|
Current
portion of long-term debt and notes payable
|
|
|
649,253
|
|
|
4,269,519
|
|
Accounts
payable and accrued expenses
|
|
|
16,560,135
|
|
|
17,402,911
|
|
Deferred
revenue
|
|
|
4,746,159
|
|
|
4,343,754
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
35,667,968
|
|
|
30,516,184
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Convertible
debentures, net of unamortized debt discount and
|
|
|
|
|
|
|
|
current
portion
|
|
|
3,243,011
|
|
|
9,995,243
|
|
Notes
payable and other long-term liabilities, net of current
maturities
|
|
|
1,699,482
|
|
|
650,419
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
4,942,493
|
|
|
10,645,662
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
40,610,461
|
|
|
41,161,846
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,035,425 shares authorized,
|
|
|
|
|
|
|
|
35,378
shares issued and outstanding at March 31, 2006 and September
30, 2006
|
|
|
35
|
|
|
35
|
|
Common
stock, $.001 par value, 1,500,000,000 shares authorized,
|
|
|
|
|
|
|
|
560,666,950
and 589,189,570 shares issued and outstanding
|
|
|
|
|
|
|
|
at
March 31, 2006 and September 30, 2006
|
|
|
589,259
|
|
|
560,667
|
|
Additional
paid-in capital
|
|
|
91,952,135
|
|
|
83,641,462
|
|
Accumulated
deficit
|
|
|
(40,221,378
|
)
|
|
(31,372,957
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
52,320,051
|
|
|
52,829,207
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
92,930,512
|
|
$
|
93,991,053
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
23,410,650
|
|
$
|
26,546,650
|
|
$
|
46,753,436
|
|
$
|
49,052,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
13,137,246
|
|
|
11,654,395
|
|
|
25,899,204
|
|
|
22,676,257
|
Payroll,
professional fees and related expenses (exclusive of stock
compensation)
|
|
|
5,304,277
|
|
|
5,536,347
|
|
|
11,209,730
|
|
|
9,229,905
|
Advertising
and marketing expenses
|
|
|
590,207
|
|
|
799,193
|
|
|
1,291,958
|
|
|
1,317,857
|
Office
rent and expenses
|
|
|
748,548
|
|
|
933,737
|
|
|
1,581,209
|
|
|
1,714,852
|
Other
general and administrative expenses
|
|
|
4,783,994
|
|
|
5,210,715
|
|
|
9,390,997
|
|
|
9,527,617
|
Depreciation
and amortization
|
|
|
1,448,892
|
|
|
1,047,319
|
|
|
2,779,803
|
|
|
1,869,696
|
Stock
compensation
|
|
|
471,556
|
|
|
—
|
|
|
956,647
|
|
|
—
|
Goodwill
impairment charges
|
|
|
529,736
|
|
|
—
|
|
|
877,854
|
|
|
—
|
Restructuring
charges
|
|
|
(19,832
|
)
|
|
—
|
|
|
283,839
|
|
|
—
|
Total
Operating Costs and Expenses
|
|
|
26,994,624
|
|
|
25,181,706
|
|
|
54,271,241
|
|
|
46,336,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME/(LOSS)
|
|
|
(3,583,974
|
)
|
|
1,364,944
|
|
|
(7,517,805
|
)
|
|
2,716,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE, NET
|
|
|
(526,940
|
)
|
|
(698,335
|
)
|
|
(921,015
|
)
|
|
(1,630,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTERESTS IN NET (INCOME)/LOSS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
SUBSIDIARIES
|
|
|
—
|
|
|
(142,709
|
)
|
|
—
|
|
|
(142,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
ON EXTINGUISHMENT OF DEBT
|
|
|
—
|
|
|
—
|
|
|
(409,601
|
)
|
|
—
|
NET
INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(4,110,914
|
)
|
|
523,900
|
|
|
(8,848,421
|
)
|
|
943,092
|
Provision
for Income Taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME/(LOSS) APPLICABLE TO COMMON SHARES
|
|
$
|
(4,110,914
|
)
|
$
|
523,900
|
|
$
|
(8,848,421
|
)
|
$
|
943,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME/(LOSS) PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.0070
|
)
|
$
|
0.0014
|
|
$
|
(0.0151
|
)
|
$
|
0.0025
|
Diluted
|
|
$
|
(0.0070
|
)
|
$
|
0.0012
|
|
$
|
(0.0151
|
)
|
$
|
0.0023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
|
|
|
589,065,246
|
|
|
388,001,055
|
|
|
584,586,874
|
|
|
374,464,022
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For
the Six Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income/(loss)
|
|
$
|
(8,848,421
|
)
|
$
|
943,092
|
|
Items
that reconcile net income/(loss) to net cash
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,779,803
|
|
|
1,869,686
|
|
Noncash
interest expense and loss on debt extinguishment
|
|
|
882,649
|
|
|
352,597
|
|
Goodwill
impairment charges
|
|
|
877,854
|
|
|
—
|
|
Restructuring
charges
|
|
|
283,839
|
|
|
—
|
|
Minority
interests
|
|
|
—
|
|
|
142,709
|
|
Common
stock issued for services
|
|
|
992,647
|
|
|
—
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
1,390,429
|
|
|
(639,113
|
)
|
Decrease
in other current assets
|
|
|
562,045
|
|
|
435,625
|
|
(Increase)
in other assets
|
|
|
(199,334
|
)
|
|
(649,960
|
)
|
(Decrease)
in accounts payable and
|
|
|
|
|
|
|
|
and
accrued expenses
|
|
|
(2,766,062
|
)
|
|
(2,230,804
|
)
|
Increase
in deferred revenue
|
|
|
168,182
|
|
|
439,486
|
|
|
|
|
4,972,052
|
|
|
(279,774
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating
activities
|
|
|
(3,876,369
|
)
|
|
663,318
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from the sale/leaseback of wireless network equipment
|
|
|
2,000,000
|
|
|
—
|
|
Purchase
of certificates of deposit
|
|
|
(758,035
|
)
|
|
—
|
|
Capital
expenditures, net
|
|
|
(4,543,094
|
)
|
|
(1,641,539
|
)
|
Acquisition
of intangible assets
|
|
|
(37,167
|
)
|
|
(6,778,129
|
)
|
Cash
paid for acquisitions
|
|
|
—
|
|
|
(2,024,646
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(3,338,296
|
)
|
|
(10,444,314
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
proceeds from common stock issuances
|
|
|
6,660,652
|
|
|
12,374,500
|
|
Borrowings/(payments)
under other notes payable, net
|
|
|
(3,823,250
|
)
|
|
(4,282,763
|
)
|
Proceeds
from the issuance of convertible debentures
|
|
|
2,438,500
|
|
|
15,500,000
|
|
Retirement
of acquisition bridge loan
|
|
|
—
|
|
|
(13,000,000
|
)
|
Investment
by minority interests
|
|
|
—
|
|
|
3,675,000
|
|
Financing
fees
|
|
|
(176,000
|
)
|
|
(1,295,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
5,099,902
|
|
|
12,971,737
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(unaudited)
|
|
For
the Six Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$ |
(2,114,763
|
)
|
$
|
3,190,741
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
5,397,881
|
|
|
4,669,787
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
3,283,118
|
|
$
|
7,860,528
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
|
|
|
|
|
|
|
INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
1,070,210
|
|
$
|
1,034,928
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH
|
|
|
|
|
|
|
|
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Amended Debenture to Cornell Capital
|
|
$
|
15,149,650
|
|
$
|
—
|
|
Return
of Debenture by Cornell Capital
|
|
$
|
15,000,000
|
|
$
|
—
|
|
Capital
lease
|
|
$
|
1,875,721
|
|
$
|
—
|
|
Amortization
of SEDA deferred financing fees
|
|
$
|
147,000
|
|
$
|
440,000
|
|
Goodwill
recorded in acquisitions
|
|
$
|
—
|
|
$
|
2,277,840
|
|
Liability
for common stock to be issued
|
|
$
|
—
|
|
$
|
422,513
|
|
Conversion
of liabilities to common stock
|
|
$
|
—
|
|
$
|
1,058,841
|
|
Adjustment
to minority interest
|
|
$
|
—
|
|
$
|
150,000
|
|
Issuance
of common stock for acquisitions
|
|
$
|
—
|
|
$
|
366,406
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006
(unaudited)
NOTE
1-ORGANIZATION
Overview
MobilePro
Corp., incorporated under the laws of the State of Delaware in July 2000, is
a
broadband wireless, telecommunications, and integrated data communication
services company that delivers a comprehensive suite of voice and data
communications services to its customers, including local exchange, long
distance, enhanced data, Internet, cellular, and wireless broadband, through
its
operations in three industry segments - voice services, Internet services and
wireless networks. Together with its consolidated subsidiaries, Mobilepro Corp.
is hereinafter referred to as “Mobilepro” or the “Company”.
The
Company’s voice services segment includes the operations of CloseCall America,
Inc. (“CloseCall”), a Stevensville, Maryland-based competitive local exchange
carrier (a “CLEC”), Davel Communications, Inc. (“Davel”), a Cleveland,
Ohio-based independent payphone provider, and American Fiber Network, Inc.
(“AFN”), a CLEC based in Kansas City, Kansas. The Company’s Internet services
segment includes DFW Internet Services, Inc. (“DFW”, doing business as
Nationwide Internet), an Irving, Texas-based Internet services provider, its
acquired Internet service provider subsidiaries, and InReach Internet L.L.C.
(“InReach”), an Internet service provider based in Stockton, California. The
Company’s municipal wireless networks operations are conducted primarily by a
wholly owned subsidiary, NeoReach, Inc. (“NeoReach”), and its subsidiary, Kite
Networks, Inc. (“Kite Networks”, formerly known as NeoReach Wireless, Inc.). The
wireless networks segment also includes the operations of the Company’s
subsidiary, Kite Broadband, LLC (“Kite Broadband”), a broadband wireless service
provider. Both Kite Networks and Kite Broadband are based in Ridgeland,
Mississippi.
Current
Business Conditions
The
Company has historically lost money. In the years ended March 31, 2006 and
2005,
the Company sustained net losses of $10,176,407 and $5,359,722, respectively.
In
addition, the Company incurred a net loss of $8,848,421 in the six months ended
September 30, 2006 caused primarily by declining revenues. As a result, the
amount of cash used in operations during the six months ended September 30,
2006
was $3,876,369. Future losses may occur. Accordingly, the Company will
experience liquidity and cash flow problems if it is unable to improve its
operating performance or raise additional capital as needed and on acceptable
terms.
As
discussed below in Note 7 to the condensed consolidated financial statements,
the Company has an agreement with Cornell Capital that would provide additional
financing of approximately $4.7 million over the next several months and has
obtained an agreement that should provide up to $3.0 million in lease financing
for future wireless network equipment purchases. Recent agreements have been
announced that should provide increased revenues to the Company. Recent
management changes should enhance the effectiveness of the Company’s efforts to
increase recurring revenues of its existing businesses, and management has
taken
certain actions that should result in a continued reduction in the level of
the
Company’s operating expenses for the remainder of the fiscal year.
If
the
Company fails to obtain sufficient capital financing or eliminate the net losses
and negative cash flows of its operating businesses, the Company will be
required to consider other alternatives, including the reduction of its
operations (in particular the deployment of additional municipal wireless
networks), the discontinuance or disposal of certain assets or operations,
or
the sale of the Company.
Under
the
terms of a $15.1 million debenture issued to Cornell Capital Partners, L.P.
(“Cornell Capital”), the Company is currently required to make weekly scheduled
principal payments of at least $250,000 commencing in mid-November 2006 with
interest on the outstanding principal balance payable at the same time. The
amount of accrued interest was $295,937 at September 30, 2006. The Company
has
the right to make any and all such principal payments by issuing shares of
its
common stock to Cornell Capital provided that
all
such shares may only be issued by the Company if such shares are tradable under
Rule 144 of the Securities Act of 1933 (the “Securities Act”), are registered
for sale under the Securities Act or are freely tradable by Cornell Capital
without restriction. The Company filed a registration statement on Form S-3
on
October 12, 2006 covering such shares, but it has not yet received clearance
from the Securities Exchange Commission that would allow the registration to
be
declared effective.
There
can
be no assurance that the registration statement on Form S-3 will become
effective, or become effective in time to allow the Company to make its
scheduled debenture maturity payments with shares of its common stock. In the
event that the Form S-3 is not declared effective, alternative sources of cash
are not identified, or Cornell Capital does not agree to a delay in the
commencement of the scheduled maturity payments, the Company may be unable
to
make these payments in cash putting the Company in default of the terms of
the
Amended Debenture.
Summary
of Acquisition Activities since April 1, 2005
In
May
2005, NeoReach acquired WazAlliance, a network of metro-wide commercial and
residential wireless Internet access zones for a total purchase price of
$257,500. Consideration included the issuance of 760,000 shares of Mobilepro’s
common stock valued at $110,200, a liability to issue up to an additional
540,000 shares of common stock valued at $78,300, and the payment of certain
liabilities in the amount of $69,000 on behalf of WazAlliance. Subsequent to
the
acquisition, 173,334 of the additional shares of common stock were
issued.
In
June
2005, the Company acquired Evergreen Open Broadband (“Evergreen”), a wholesale
wireless Internet service provider based in Boston, for a purchase price of
approximately $231,073 representing 1,505,360 shares of Mobilepro common stock
valued at $0.1535 per share based on the date that the parties reached agreement
on the terms of the acquisition.
In
June
2005, Mobilepro acquired 100% of the outstanding common stock of AFN (see Note
5), a CLEC that is licensed to provide local telephone, long distance and/or
Internet services throughout the United States, for a cost of $3,434,331,
including 10,000,000 shares of Mobilepro common stock, valued at $1,500,000
based on the value of the Company's common stock at the time that the
substantive terms of the acquisition were accepted, a cash payment of $1,500,000
and the excess of liabilities assumed over the fair value of assets
acquired. The assumed liabilities included $1,337,103 payable to a related
party
company that supplied administrative and support services to AFN.
In
September 2005, AFN acquired the assets of AllCom USA and its long distance
and
T-1 customers for $300,000 cash, providing the Company with an additional base
of customers for bundled services.
In
November 2005, Mobilepro acquired InReach for a cost of $2,966,861, including
cash payments of $2,166,861 and 3,669,725 shares of Mobilepro common stock,
valued at $800,000 based on the value of the Company's common stock at the
time
that the substantive terms of the acquisition were accepted (see Note
5).
On
January 31, 2006, the Company acquired the 49% minority interest in Kite
Broadband and 100% of the outstanding common stock of Kite Networks, Inc. for
90,000,000 shares of the Company’s common stock, subject to certain post-closing
adjustments (see Note 6). For accounting purposes, the common stock was valued
at $15,660,000, or $0.174 per share, the closing price per share on the date
that the parties agreed to the acquisition. Subsequent to the acquisition,
Kite
Networks, Inc. was merged into NeoReach Wireless, Inc., and the combined entity
was renamed Kite Networks, Inc. (“Kite Networks”).
NOTE
2-SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statement Presentation
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation. In accordance with the requirements
of
Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about
Segments of an Enterprise and Related Information”, the Company has provided
certain financial information relating to the operating results and assets
of
its industry segments (see Note 12) based on the manner in which management
disaggregates the Company in making internal operating decisions.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those
estimates.
These
financial statements are unaudited and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all
of
the information and footnotes required by generally accepted accounting
principles for complete financial statements, and it is suggested that these
financial statements be read in conjunction with the financial statements,
and
notes thereto, included in the Company’s Annual Report on Form 10-KSB/A for the
fiscal year ended March 31, 2006. In the opinion of management, the comparative
financial statements for the periods presented herein include all adjustments
that are normal and recurring, and that are necessary for a fair presentation
of
results for the interim periods. The results of operations for the three and
six
months ended September 30, 2006 are not necessarily indicative of the results
that will be achieved for the fiscal year ending March 31, 2007.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the presentation
as of
September 30, 2006 and for the three and six months then ended. These changes
had no effect on the Company’s consolidated balance sheet as of March 31, 2006
or on the net income/loss amounts and net cash flows of the Company for the
three and six months ended September 30, 2005.
Accounting
for Stock Options and Warrants
In
prior
years, the Company accounted for its stock-based compensation under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations
(“APB 25”). APB 25 provided that compensation expense relative to a Company’s
employee stock options was measured based on the intrinsic value of the stock
options at the measurement date.
In
December 2004, the Financial Accounting Standards Board revised SFAS
No. 123, “Accounting for Certain Transactions Involving Stock
Compensation”
(“SFAS
123”). The revision was entitled “Share-Based Payment” (“SFAS 123R”), replacing
SFAS 123 and superseding APB 25, and its scope encompasses a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS 123R requires that the compensation cost relating to
share-based payment transactions be recorded in financial statements. For each
transaction, compensation cost is to be measured based on the fair value of
the
equity or liability instrument issued. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial statement
recognition of compensation expense. The Company adopted SFAS 123R, effective
April 1, 2006 (see Note 9). The amounts of related compensation expense recorded
for the three and six months ended September 30, 2006 were $471,556 and
$956,647, respectively.
Revenue
Recognition
The
Company derives a material portion of its revenues through the provision of
local telephone, long distance, wireless calling and Internet access services
to
subscribers. The Company recognizes revenue related to these telecommunications
services when such services are rendered and collection is reasonably assured;
it defers revenue for services that the Company bills in advance. Revenue
related to service contracts covering future periods is deferred and recognized
ratably over the periods covered by the contracts.
A
material amount of the Company’s revenues is also generated from the use of
Davel’s payphones. Davel derives its payphone revenue from two principal
sources: coin calls and non-coin calls. Revenue related to all calls, including
dial-around compensation and operator service revenue, is recognized in the
periods that the customers place the calls. Any variations between recorded
amounts of revenue and actual cash receipts are accounted for at the time of
receipt. Revenue related to such dial-around calls is recognized initially
based
on estimates. Recorded amounts of revenue may be adjusted based on actual
receipts and/or the subsequent revision of prior estimates. Reported revenues
for the three months ended June 30, 2006 reflected a reduction to previously
recorded revenues of $143,516; no such adjustment was recorded in the three
months ended September 30, 2006, or in the prior year periods ended September
30, 2005. Total dial-around revenue amounts for the three-month periods ended
September 30, 2006 and 2005 were approximately $1,749,000 and $2,574,000,
respectively.
Restricted
Cash
The
Company is required to maintain letters of credit collateralized by cash or
pledged certificates of deposit as additional security for the performance
of
obligations under certain service or lease agreements. The cash collateral
is
restricted and is not available for the Company’s general working capital
needs.
Accounts
Receivable
The
Company had allowances for doubtful accounts of $953,222 and $883,232 at
September 30, 2006 and March 31, 2006, respectively, relating to accounts
receivable other than dial-around compensation amounts.
Accounts
receivable includes amounts related to dial-around revenue. The estimated
dial-around receivable amount at each balance sheet date is based on the
Company’s historical collection experience. Dial-around receivable amounts
included in the balance sheets at September 30, 2006 and March 31, 2006 were
$3,770,659 and $4,509,063, respectively.
Financing
Fees
The
financing fees paid in May 2004 to Cornell Capital and others related to the
negotiation of the Standby Equity Distribution Agreement (the “SEDA”) were
deferred and, for the periods presented herein, were amortized against
additional paid-in-capital on a straight-line basis over the twenty-four (24)
month term of the SEDA. These fees were paid with the issuance of 8,000,000
shares of Mobilepro common stock valued in the amount of $1,760,000. The Company
recorded amortization of approximately $220,000 in the quarter ended September
30, 2005. Amortization was $147,000 and $440,000 in the six-month periods ended
September 2006 and 2005. Amortization of this balance concluded in May 2006.
The
fees paid to Cornell Capital and others at the time that funds are drawn under
equity lines of credit, amounting to $60,500 in the three months ended September
30, 2005, and $86,000 and $375,500, respectively, in the six-month periods
ended
September 30, 2006 and 2005, were charged to additional paid-in-capital.
The
Company also incurred financing costs of $1,295,000 in May 2005 in connection
with issuance of the $15.5 million convertible debenture and $176,000 in August
2006 in connection with the issuance of the $2.3 million convertible debenture
(see Note 7). These costs, including fees paid in cash to Cornell Capital,
were
charged to additional paid-in-capital.
Advertising
Contracts
CloseCall
uses print, signage, radio and television advertising to market services to
customers of certain local professional sports teams. Advertising programs
include the use of long-term contracts. Upon the negotiation of such a contract,
the Company records the cost of the advertising program as an asset, and
amortizes the balance to operating expenses over the life of the contract.
The
corresponding contract liability is paid typically in installments. At September
30, 2006, prepaid expenses and other assets included balances of $360,997 and
$294,572, respectively, related to such contracts, and accounts payable and
long-term liabilities included balances of $410,125 and $228,870, respectively,
that are payable under such contracts. At March 31, 2006, prepaid expenses
and
other assets included balances of $366,995 and $474,569, respectively, related
to such contracts, and accounts payable and long-term liabilities included
balances of $304,560 and $475,493, respectively, that are payable under such
contracts.
Property,
Plant and Equipment
At
March
31, 2006 and September 30, 2006, property, plant and equipment values were
as
follows:
|
|
Estimated
|
|
|
|
|
|
|
|
Useful
|
|
September
30,
|
|
March
31,
|
|
|
|
Lives
(in years)
|
|
2006
|
|
2006
|
|
|
|
|
|
(unaudited)
|
|
|
|
Furniture
and fixtures
|
|
|
7
|
|
$
|
563,569
|
|
$
|
698,828
|
|
Machinery
and equipment
|
|
|
5
|
|
|
23,941,626
|
|
|
20,561,029
|
|
Leasehold
improvements
|
|
|
7
|
|
|
518,560
|
|
|
788,610
|
|
Vehicles
|
|
|
5
|
|
|
156,194
|
|
|
204,205
|
|
Subtotals
|
|
|
|
|
|
25,179,949
|
|
|
22,252,672
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(6,049,133
|
)
|
|
(6,393,418
|
)
|
Fixed
assets, net
|
|
|
|
|
$
|
19,130,816
|
|
$
|
15,859,254
|
|
Customer
Contracts and Relationships
In
connection with the acquisition of certain customer rights under an agreement
with Sprint Communications Company L.P. (“Sprint”), Kite Broadband made an
up-front payment of $6,578,550 on June 30, 2005. Accordingly, the amount of
this
payment was capitalized and allocated between the value ascribed to the
initial three-year term of the agreement with Sprint, amounting to $1,966,200,
and the value ascribed to the bargain purchase option, amounting to
$4,612,350.
The
amount assigned to the initial term of the agreement is being amortized on
a straight-line basis over the initial three-year term. The Company has
estimated the total life of this arrangement to be ten years based upon an
analysis of the operating history of the subscriber base and the average monthly
disconnects. The Company intends to evaluate the value of these intangible
assets for potential impairment at least annually and to adjust both the asset
values and the prospective life in the future if determined necessary. Despite
the loss of approximately 14.8% of the customers acquired from Sprint, the
Company has evaluated that the fair value of these intangible assets exceeds
the
total aggregate carrying value at September 30, 2006. For the quarters ended
September 30, 2006 and 2005, amortization expense was $165,702 and $165,351,
respectively. For the six months ended September 30, 2006, amortization expense
was $331,404.
This
account also includes location contracts with net balances of $1,915,065 and
$2,220,479 at September 30, 2006 and March 31, 2006, respectively, representing
Davel acquisition costs allocated to location owner payphone contracts and
other
costs associated with obtaining written and signed location contracts. These
other assets are amortized on a straight-line basis over their estimated useful
lives based on contract terms which are generally five years. Accumulated
amortization related to these contracts at September 30, 2006 and March 31,
2006
was $1,164,689 and $859,276, respectively. Amortization related to location
contracts was $152,706 and $160,317, respectively, for the quarters ended
September 30, 2006 and 2005, and was $305,412 and $320,609, respectively, for
the six months ended September 30, 2006 and 2005.
Accounts
Payable and Accrued Liabilities
At
September 30, 2006 and March 31, 2006, accounts payable and accrued liabilities
consisted of the following:
|
|
September
30,
|
|
March
31,
|
|
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
Accounts
payable
|
|
$
|
10,147,772
|
|
$
|
10,229,960
|
|
Accrued
location usage fees
|
|
|
2,049,541
|
|
|
2,271,060
|
|
Accrued
restructuring costs
|
|
|
481,213
|
|
|
486,311
|
|
Accrued
compensation
|
|
|
709,633
|
|
|
1,048,027
|
|
Accrued
interest expense
|
|
|
312,476
|
|
|
873,206
|
|
Other
accrued liabilities
|
|
|
2,859,500
|
|
|
2,494,347
|
|
Totals
|
|
$
|
16,560,135
|
|
$
|
17,402,911
|
|
Income
Taxes
Because
of its history of losses, the Company has not had any material federal or state
income tax obligations.
NOTE
3-IMPAIRMENT
OF GOODWILL
At
September 30, 2006, the Company’s balance sheet included intangible assets with
an aggregate carrying value of approximately $55,339,000, representing
approximately 59.5% of total assets and including $47,220,042 in goodwill.
Substantially, this goodwill was recorded in connection with the series of
acquisitions completed by the Company since January 1, 2004. Generally accepted
accounting principles require that the Company assess the fair values of
acquired entities at least annually in order to identify any impairment in
the
values. However, on a quarterly basis, management is alert for events or
circumstances that would indicate that, more likely than not, the fair value
of
a reporting segment has been reduced below its carrying amount. If there is
a
determination that the fair value of an acquired entity is less than the
corresponding net assets amount, including goodwill, an impairment loss would
be
identified and recorded at that time. As a result of such assessments, goodwill
impairment charges of $529,736 and $877,854, respectively, were recorded in
the
three and six months ended September 30, 2006 related to the Internet services
business segment. Management believes that the remaining amounts of goodwill
included in the balance sheet at September 30, 2006 do not exceed the
corresponding fair values of these assets.
NOTE
4-RESTRUCTURING
OF OPERATIONS
During
the year ended March 31, 2006, management began to focus on the integration
of
the operations of the acquired companies, in particular the operations of the
Internet services business segment. The efforts are focused on combining service
offerings, consolidating network operations and customer support locations,
and
reducing operating costs. At September 30, 2006, the accrued restructuring
costs
balance was $481,213, including $304,631 related to the loss expected on the
abandonment of leased facilities and $176,582 related to the termination of
certain employees. At March 31, 2006, the accrued restructuring costs balance
was $486,311. During the quarter ended June 30, 2006, the Company recorded
a
restructuring charge related to the termination of additional employees in
the
amount of $303,671. During the quarter ended September 30, 2006, the Company
recorded an additional restructuring charge related to the disposal of fixed
assets in the amount of $75,835, and reversed a portion of the reserve related
to employee termination costs in the amount of $95,667. As a result, the net
restructure charge reflected in the condensed consolidated statement of
operations for the six months ended September 30, 2006 was $283,839. During
the
three and six months ended September 30, 2006, the Company made related payments
totaling $169,877 and $213,103, respectively. The Company expects to incur
additional restructuring charges throughout the remainder of the current fiscal
year related to the consolidation of additional office locations and reductions
in personnel.
NOTE
5-THE
ACQUISITIONS OF AFN AND INREACH
The
acquisition of AFN occurred on June 30, 2005. Accordingly, the operating results
of AFN are included in the operating results of the Company from and including
July 1, 2005. The accompanying condensed consolidated statements of operations
include revenues related to AFN, excluding inter-company sales, of $2,136,987
and $1,632,488, respectively, for the quarters ended September 30, 2006 and
2005, and $4,168,273 for the six months ended September 30, 2006.
The
acquisition of InReach occurred on November 1, 2005. Accordingly, the operating
results of InReach are included in the operating results of the Company from
and
including November 1, 2005. The accompanying condensed consolidated statements
of operations for the three and six months ended September 30, 2006 include
revenues related to InReach of $1,095,400 and $2,334,995,
respectively.
NOTE
6-THE
FORMATION OF KITE BROADBAND
In
June
2005, the Company participated in the funding of Kite Broadband by making an
investment of $3,825,000 in cash and in consideration receiving 51% ownership.
The minority owners invested $3,675,000 in cash. On June 30, 2005, Kite
Broadband closed a Master Agreement for Services (the “Sprint Agreement”) with
Sprint under which Kite Broadband shall provide services to Sprint’s broadband
customers in fourteen (14) metropolitan markets for a period of three years
utilizing the Sprint mark. The Sprint Agreement covers, among other things,
the
provisioning of certain customer-facing services, such as customer operations
and call center management, sales, marketing, billing, collection, installation
and repair. Sprint continues to provide network support and transport services.
The customers remain Sprint customers during the initial three-year term of
the
Sprint Agreement. Upon expiration of the Sprint Agreement, the Company will
have
the option to acquire the then existing customers pursuant to the terms of
the
Sprint Agreement. All network and spectrum assets will remain Sprint property.
In December 2005, Kite Broadband made a cash distribution of $127,500 to its
investors. The Company’s share of the distribution was $65,025.
On
January 31, 2006, the Company acquired the minority interest in Kite Broadband
and the business of Kite Networks. On the acquisition date, the balance of
the
minority interest in Kite Broadband was approximately $3,797,000. Kite Networks’
most significant asset was its investment in Kite Broadband.
The
operating results of Kite Broadband have been included in the operating results
of the Company from and including July 1, 2005, the date that operations
commenced. The accompanying condensed consolidated statements of operations
include revenues related to Kite Broadband of $2,893,582 and $3,385,314,
respectively, for the three months ended September 30, 2006 and 2005, and
$5,876,580 for the six months ended September 30, 2006.
NOTE
7-DEBT
The
Tranche Debenture Agreement
On
August
28, 2006, the Company entered into a financing agreement with Cornell Capital
providing up to $7.0 million in debt financing with the proceeds provided in
three tranches (the “Tranche Debenture Agreement”). At the closing of each
tranche, the Company will issue Cornell Capital a 7.75% secured convertible
debenture in the principal amount for that tranche, convertible into common
stock at $0.174 per share, together with a warrant to purchase up to 3,333,334
shares of common stock at an exercise price of $0.174 per share. On August
30,
2006, the Company closed the first tranche in the amount of $2.3 million,
issuing the First Tranche Debenture and the First Tranche Warrant, receiving
cash proceeds of $2,124,000 that were net of financing fees in the amount of
$176,000. Under the terms of this First Tranche Debenture, the Company will
make
weekly scheduled principal payments of at least $125,000 commencing January
2,
2007, with interest on the outstanding principal balance payable at the same
time.
Under
conditions similar to those included in the Amended Debenture (see discussion
below), the Company has the right to make any and all such principal payments
by
issuing shares of its common stock to Cornell Capital with the amount of such
shares based upon the lower of $0.174 per share or 93% of the average of the
two
lowest daily volume weighted average per share prices of its common stock during
the five days immediately following the scheduled payment date. Cornell Capital
may convert all or any part of the unpaid principal and accrued interest owed
under the First Tranche Debenture into shares of our common stock at a
conversion price of $0.174 per share.
Under
an
amendment to the Tranche Debenture Agreement signed on October 23, 2006, the
additional tranches were rescheduled such that $1,175,000 of gross proceeds
will
be available no later than November 15, 2006, $1,175,000 of gross proceeds
will
be available on February 1, 2007, and $2,350,000 will be available upon the
Company successfully registering the conversion shares of common stock for
resale. The Company filed a registration statement on Form S-3 on October 12,
2006, but it has not yet received clearance from the Securities Exchange
Commission (the “SEC”) that would allow the registration to be declared
effective. Pursuant to the terms of the related investor registration rights
agreement, in the event that the registration statement covering these shares
is
not declared effective by May 1, 2007, the Company will be obligated to pay
liquidated damages to Cornell Capital in an amount not to exceed 20% of the
amount of the issued debentures.
The
term
of the First Tranche Warrant will expire five years from the date of issuance.
If the Company issues additional equity or instruments convertible into equity
as described in the First Tranche Warrant, or is deemed to have done so, at
a
lower per share price than the then-effective First Tranche Warrant exercise
price, the exercise price may be adjusted downward to such lower per share
price. In that case, the number of shares issuable upon exercise of the First
Tranche Warrant would be increased so that the total exercise price would remain
$580,000.
The
face
amount of the First Tranche Debenture was recorded initially in the balance
sheet net of unamortized debt discount of $270,333. The net amount of the First
Tranche Debenture reflects the fair market value on the date of issuance after
allocating $270,333 of the proceeds to the First Tranche Warrant. This discount
amount will be amortized as a charge to interest expense over the term of the
First Tranche Debenture.
In
connection with the negotiation of the Tranche Debenture Agreement, the payment
terms of the Amended Debenture were revised, and the warrant exercise prices
and
the number of shares subject to exercise under the Warrant and the Additional
Warrant were reset to the terms and amounts discussed below resulting in
additional interest expense during the current quarter as discussed below.
The
Amended Debenture
On
May 13, 2005, the Company issued a 7.75% secured convertible debenture (the
“Debenture”) to Cornell Capital in the aggregate amount of $15,500,000. The
Company used most of the proceeds to pay in full the remaining $13,000,000
balance of a note payable that bore interest at the rate of 23% and was due
on
November 15, 2005; the retired note was the source of bridge financing for
the
Company’s acquisition of Davel. Results of operations for the quarter ended June
30, 2005 included interest expense related to the retired note of
$381,225.
The
outstanding balance of the Debenture at March 31, 2006 of $15,000,000 was due
and payable in a series of installment payments through May 15, 2008, including
$1,500,000 due on May 15, 2006 and $1,000,000 due on August 15, 2006.
On
June
30, 2006, the Company entered into an amended secured convertible debenture
in
the amount of $15,149,650 with Cornell Capital (the “Amended Debenture”),
replacing the Debenture. Under the terms of the Amended Debenture, as revised,
the Company has agreed to make weekly scheduled principal payments of at least
$250,000 commencing November 15, 2006 with interest on the outstanding principal
balance payable at the same time. The Company has the right to make any and
all
such principal payments by issuing shares of its common stock to Cornell Capital
provided
that all
such shares may only be issued by the Company if such shares are tradable under
Rule 144 of the Securities Act of 1933 (the “Securities Act”), are registered
for sale under the Securities Act, or are freely tradable by Cornell Capital
without restriction. The amount of such shares shall be based upon the lower
of
$0.275 per share or 93% of the average of the two lowest daily volume weighted
average per share prices of the Company’s common stock during the five days
immediately following the scheduled payment date. Cornell Capital may elect
to
receive interest in cash or in the form of common stock. Cornell Capital may
convert all or any part of the unpaid principal and accrued interest owed under
the Amended Debenture into shares of our common stock at a conversion price
of
$0.275 per share. The Amended Debenture eliminated the requirement to renew
the
SEDA and is secured by a blanket lien on our assets. Like the Debenture, the
Amended Debenture bears interest at an annual rate of 7.75%. The conversion
price of the Amended Debenture may be adjusted if the Company issues additional
equity or instruments convertible into equity in connection with a transaction
such as a stock dividend or a stock split pursuant to a formula included in
the
Amended Debenture.
In
connection with the issuance of the Debenture, the Company issued to Cornell
Capital a five-year warrant, as modified, to purchase 15,000,000 shares of
its
common stock at an exercise price of $0.20 per share (the “Warrant”). If the
Company issues additional equity or instruments convertible into equity as
described in the Warrant, or is deemed to have done so, at a lower per share
price than the then-effective Warrant exercise price, the exercise price may
be
adjusted downward to such lower per share price. In that case, the number of
shares issuable upon exercise of the Warrant would be increased so that the
total exercise price would remain $3,000,000.
In
connection with the issuance of the Amended Debenture, Cornell Capital was
issued a warrant, as modified, to purchase 13,750,000 shares of the Company’s
common stock at a purchase price of $0.20 per share (the “Additional Warrant”).
This Additional Warrant will expire one year after the date that the Company
registers the underlying shares for resale by Cornell Capital with the SEC.
If
the Company issues additional equity or instruments convertible into equity
as
described in the Additional Warrant, or is deemed to have done so, at a lower
per share price than the then-effective Additional Warrant exercise price,
the
exercise price may be adjusted downward to such lower per share price. In that
case, the number of shares issuable upon exercise of the Additional Warrant
would be increased so that the total exercise price would remain
$2,750,000.
The
face
amount of the Amended Debenture was recorded initially in the balance sheet
net
of unamortized debt discount of $319,000. During the current quarter, the fair
value of the Additional Warrant was recalculated based on its reset terms
resulting in an increase to such value of $192,500. The net amount of the
Amended Debenture at September 30, 2006 reflects the fair market value after
allocating additional proceeds in the amount of $192,500 to the Additional
Warrant. The increased discount on the Amended Debenture is being amortized
as a
charge to interest expense over the term of the Amended Debenture.
The
net
carrying amount of the Debenture and the related amount of accrued interest,
$14,590,399 and $149,650, respectively, were eliminated from the accounts in
connection with the issuance of the Amended Debenture and the return of the
Debenture, resulting in a loss on the extinguishment of the Debenture debt
in
the amount of $409,601 in June 2006. This amount was included in the
accompanying statement of operations for the six months ended September 30,
2006.
The
Debentures - Interest Expense
For
the
quarters ended September 30, 2006 and 2005, the amounts of interest expense
related to the Debenture, the Amended Debenture and the First Tranche Debenture,
and included in the accompanying condensed consolidated statements of operations
based on the stated interest rates, were $312,541 and $302,780, respectively.
Such interest expense amounts were $602,370 and $460,753, respectively, for
the
six months ended September 30, 2006 and 2005.
Interest
expense amounts included in the accompanying condensed consolidated statements
of operations for the current and prior year periods included total debt
discount amortization related to the debentures issued to Cornell Capital.
Such
amounts were $149,115 and $100,950, respectively, in the three months ended
September 30, 2006 and 2005, and $246,254 and $151,425, respectively, in the
six
months ended September 30, 2006 and 2005. Interest expense for the three and
six
months ended September 30, 2006 also included an amount, $89,000, equal to
the
increase in the fair value of the Warrant based on its terms that were reset
during the current quarter.
Notes
Payable to Cornell Capital
During
the two-year period ended March 31, 2006, the Company borrowed amounts from
Cornell Capital that totaled $31,500,000 pursuant to a series of promissory
notes with maturities of one-year or less and annual interest rates ranging
from
8% to 12%. A remaining total principal balance of $3,600,000, plus accrued
interest of $392,953, was owed to Cornell Capital at March 31, 2006. These
amounts were paid during the quarter ended June 30, 2006 with cash provided
by
the Company’s operating units. Interest expense related to the notes payable to
Cornell Capital, based on the stated rates of interest and included in the
accompanying condensed consolidated statements of operations for the six months
ended September 30, 2006 and 2005, were $25,074 and $432,361, respectively.
Such
interest expense was $198,049 for the quarter ended September 30,
2005.
Capital
Leases
On
June
30, 2006, the Company received $2,000,000 in cash proceeds from the sale of
certain municipal wireless network equipment that has been deployed in Tempe,
Arizona. Simultaneously, the Company entered into a leaseback agreement
representing a capital lease. Accordingly, a fixed asset and a capital lease
liability were recorded in the accounts at the present value of the future
lease
payments discounted at an assumed incremental borrowing rate of 10.25%, or
$1,875,721. Under this lease, the Company is obligated to make 36 monthly
payments that commenced on July 1, 2006; the lease contains an option to
purchase the equipment at the end of the lease-term at a price equal to the
fair
market value of the equipment which amount shall not exceed 23% of the original
cost of the equipment. The gain on the sale of the equipment in the amount
of
$234,223 was deferred and is being amortized to income over the term of the
lease. Proceeds in the amount of $700,000 were used to purchase certificates
of
deposit that are pledged to secure the lease obligation; this amount is included
in the balance of restricted cash in the condensed consolidated balance sheet
as
of September 30, 2006. Portions of the restricted cash may be released during
the term of the lease if the Company achieves certain objectives.
Equipment
Lease Commitment
On
October 10, 2006, the Company signed a master equipment lease agreement with
a
lease financing firm that may provide up to $3 million in lease financing
capital for future wireless network equipment purchases. The master lease
agreement is available only for the purchase of equipment manufactured by Cisco
Systems. Fifty percent of the commitment is designated for core network
infrastructure equipment. The
remainder of the commitment is available for transmission equipment purchases
and can be used to finance up to fifty percent of the cost of such purchases.
The lease term for each equipment purchase shall be twenty-four months.
Debt
Maturities
A
summary
of the balances owed under the debentures, capital leases, notes payable and
other long-term liabilities at September 30, 2006 was as follows:
Amended
Debenture
|
|
$
|
15,149,650
|
|
First
Tranche Debenture
|
|
|
2,300,000
|
|
Capital
leases
|
|
|
2,083,997
|
|
Other
notes payable and long-term obligations
|
|
|
403,237
|
|
|
|
|
19,936,884
|
|
Less:
Unamortized debt discounts
|
|
|
(632,717
|
)
|
Less:
Amounts due within one year
|
|
|
(14,361,674
|
)
|
Long-term
portion of debt
|
|
$
|
4,942,493
|
|
At
September 30, 2006, a summary of the future scheduled payments of the long-term
portion of debt was as follows:
The
twelve months ending --
|
|
|
|
September
30, 2008
|
|
$
|
4,743,909
|
|
September
30, 2009
|
|
|
605,222
|
|
|
|
|
5,349,131
|
|
Less
- Unamortized debt discount
|
|
|
(406,638
|
)
|
Long-term
portion of debt
|
|
$
|
4,942,493
|
|
NOTE
8-STOCKHOLDERS’
EQUITY
Standby
Equity Distribution Agreement (the “SEDA”)
On
May
13, 2004, the Company entered into the SEDA with Cornell Capital that provided,
generally, that Cornell Capital would purchase up to $100 million of the common
stock of Mobilepro over a two-year period, with the time and amount of such
purchases, if any, at the Company’s discretion. Cornell Capital was entitled to
purchase the shares at a 2% discount to a weighted-average market price of
the
common stock. The Company was obligated to pay a fee to Cornell Capital and
other advisors at the time of each draw. On May 19, 2006, the SEDA
expired.
Draws
under the SEDA totaled $39,173,129. The Company advanced a total of 183,996,589
shares of its common stock to the escrow agent in accordance with the terms
of
the SEDA since its inception at an average sale price of $0.213 per
share.
The
discounts provided to Cornell Capital in connection with the sale of shares
of common stock by the Company and included in the accompanying condensed
consolidated statements of operations for the six months ended September 30,
2006 and 2005 were $137,795 and $237,805, respectively. Such interest expense
was $142,847 for the quarter ended September 30, 2005.
Common
Stock Transactions in the Six Months Ended September 30, 2006
In
April
2006, the Company issued 6,021,624 shares of its common stock to a former
officer pursuant to the exercise of a stock warrant.
In
June
2006, the Company issued 200,000 shares of its common stock, valued at $36,000,
in connection with the termination of an agreement with an investment banking
firm.
In
August
2006, the Company issued 300,996 shares of its common stock to a former employee
pursuant to the exercise of stock options.
During
the quarter ended June 30, 2006, the Company issued 22,000,000 shares of common
stock to the escrow agent under the requirements of the SEDA. The termination
of
the SEDA in May 2006 resulted in the return of 3,413,365 shares of common stock
to the Company by Cornell Capital. The
return of the shares was recorded in October 2006.
NOTE
9-STOCK
OPTIONS AND WARRANTS
The
following tables summarize the stock option and warrant activity for the six
months ended September 30, 2006:
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Exercise
|
|
Stock
Options --
|
|
Options
|
|
Price
|
|
Outstanding
- March 31, 2006
|
|
|
11,076,000
|
|
$
|
0.2260
|
|
Granted
|
|
|
—
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
Cancelled
|
|
|
—
|
|
$
|
—
|
|
Outstanding
- June 30, 2006
|
|
|
11,076,000
|
|
$
|
0.2260
|
|
Granted
|
|
|
—
|
|
$
|
—
|
|
Exercised
|
|
|
(300,996
|
)
|
$
|
0.0528
|
|
Cancelled
|
|
|
(574,004
|
)
|
$
|
0.2232
|
|
Outstanding
- September 30, 2006
|
|
|
10,201,000
|
|
$
|
0.2312
|
|
|
|
|
|
|
|
|
|
Exercisable
- September 30, 2006
|
|
|
4,127,676
|
|
$
|
0.2443
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
Exercise
|
|
Stock
Warrants --
|
|
Warrants
|
|
Price
|
|
Outstanding
- March 31, 2006
|
|
|
94,932,500
|
|
$
|
0.1669
|
|
Granted
|
|
|
10,250,000
|
|
$
|
0.2732
|
|
Exercised
|
|
|
(6,021,524
|
)
|
$
|
0.0180
|
|
Cancelled
|
|
|
(478,476
|
)
|
$
|
0.0180
|
|
Outstanding
- June 30, 2006
|
|
|
98,682,500
|
|
$
|
0.1877
|
|
Granted
|
|
|
34,083,334
|
|
$
|
0.1936
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
Cancelled
|
|
|
(16,000,000
|
)
|
$
|
0.3594
|
|
Outstanding
- September 30, 2006
|
|
|
116,765,834
|
|
$
|
0.1659
|
|
|
|
|
|
|
|
|
|
Exercisable
- September 30, 2006
|
|
|
101,168,547
|
|
$
|
0.1614
|
|
Options
to purchase common stock that are awarded pursuant to the terms of the 2001
Plan
expire ten years from the date of grant. The options typically vest over two
to
three year periods according to a defined schedule set forth in the individual
stock option agreement. The vesting of certain options during fiscal year 2007
will depend on the achievement of individual and company objectives. Warrants
to
purchase shares of common stock vest over periods that range from eleven to
thirty-three months. The vesting of certain warrants awarded to certain of
the
Company’s officers will occur upon the achievement of individual and/or company
objectives. Warrants typically expire on the ten-year anniversary of the date
of
grant.
Effective
April 1, 2006, the Company adopted the provisions of SFAS 123R that requires
companies to record the compensation cost associated with stock options and
warrants. As required by SFAS 123R, the Company has determined the appropriate
fair value model to be used for valuing share-based payments, the amortization
method for compensation cost and the transition method to be used at date of
adoption. The model used by the Company in order to determine the fair values
of
the stock options and warrants awarded during the six months ended September
30,
2006 and those previously awarded options and warrants with unvested portions
at
March 31, 2006 continues to be the Black-Scholes model. The Company used the
prospective method in order to adopt this accounting standard. Accordingly,
compensation expense has been recorded in the six months ended September 30,
2006 related to new awards and the unvested stock options and warrants at March
31, 2006 on a straight-line basis over the applicable vesting periods. The
operating results for the prior-year periods were not restated.
For
the
six months ended September 30, 2005, if compensation expense had been determined
based on the fair value of the options at the grant dates consistent with the
method of accounting proscribed by SFAS No. 123, as amended, the Company’s
net income per share would have changed to the pro forma amount as presented
below:
|
|
Six
Months
|
|
|
|
Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
Net
income, as reported
|
|
$
|
943,092
|
|
Add:
Stock-based employee compensation expense included in reported
net
income
|
|
|
—
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
|
|
|
|
|
value
based method for all awards
|
|
|
(1,900,247
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(957,155
|
)
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
Diluted,
as reported
|
|
$
|
0.0023
|
|
|
|
|
|
|
Diluted,
pro forma
|
|
$
|
(0.0026
|
)
|
The
fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for awards during
the
six months ended September 30, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Dividend
yield
|
|
|
—
|
%
|
|
-
|
%
|
Expected
volatility
|
|
|
60
|
%
|
|
60
|
%
|
Risk-free
interest rate
|
|
|
4.00
|
%
|
|
3.00
|
%
|
Expected
term (in years)
|
|
|
10.00
|
|
|
10.00
|
|
For
stock
options and warrants granted during the six months ended September 30, 2006
and
2005, the weighted-average grant-date fair values were $0.10 per share and
$0.20
per share, respectively.
NOTE-10-BASIC
AND DILUTED INCOME (LOSS) PER SHARE
Basic
income (loss) per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted-average number
of
common shares outstanding for the period. Diluted income (loss) per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The effects of the assumed exercise of outstanding stock options and warrants
and the assumed conversion of the debentures for the three and six months ended
September 30, 2006 were anti-dilutive as the Company incurred net losses in
such
periods.
|
|
Three
Months Ended September 30, 2005
|
|
Six
Months Ended September 30, 2005
|
|
Net
income
|
|
$
|
523,900
|
|
$
|
943,092
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period
|
|
|
388,001,055
|
|
|
374,464,022
|
|
Add:
the treasury stock effect of stock options and warrants
|
|
|
41,914,293
|
|
|
40,930,727
|
|
Add
the effect of assumed SEDA draws
|
|
|
8,216,171
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Diluted
number of shares outstanding
|
|
|
438,131,519
|
|
|
415,394,749
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.0014
|
|
$
|
0.0025
|
|
Diluted
|
|
$
|
0.0012
|
|
$
|
0.0023
|
|
NOTE
11-LITIGATION
During
the six months ended September 30, 2006, the Company was party to the following
material legal proceedings.
1)
On
September 10, 2004, CloseCall was served a complaint in an action captioned
Verizon Maryland Inc., Verizon New Jersey Inc., and Verizon Delaware Inc.
(together referred to as “Verizon”) in the Circuit Court for Montgomery County,
Maryland, whereby Verizon was attempting to recover “in excess of $1,000,000”
based on alleged unpaid invoices for services provided to CloseCall. CloseCall
also filed counterclaims against Verizon. The first claim related to Verizon’s
refusal to resell certain bundled telecommunications services to CloseCall,
despite repeated requests by CloseCall and the requirements of the
Communications Act of 1934, as amended. In addition, CloseCall asserted damages
as a result of Verizon’s entry into secret resale agreements with two CLECs,
offering those companies deep discounts on telecommunications services not
offered to other CLECs, including CloseCall. While CloseCall believed that
its
counterclaims against Verizon were valid and that it had meritorious defenses
to
the allegations contained in Verizon’s complaint, in June 2006, it elected to
terminate these matters by agreeing to a settlement with Verizon. The effects
of
the settlement were reflected in the consolidated financial statement in the
quarter ended March 31, 2006.
2)
At the
time that the Company acquired 95.2 % of the stock of Davel, Davel was a
defendant in a civil patent infringement lawsuit captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al.,
filed
in the United States District Court for the Eastern District of Pennsylvania.
The case is in the discovery phase of the litigation. The plaintiff claims
that
Davel and other defendants allegedly infringed its patent involving the
prevention of fraudulent long-distance telephone calls and is seeking damages
in
connection with the alleged infringement. Davel does not believe that the
allegations set forth in the complaint are valid, continues to assess the
validity of the Gammino Patents and continues to determine whether the
technology purchased by Davel from third parties infringes upon the Gammino
Patents. According to the terms of the Davel acquisition agreement, the former
secured lenders, subject to certain limitations, have agreed to reimburse the
Company for the litigation costs and any losses resulting from the Gammino
lawsuit from future regulatory receipts that were assigned previously to them
by
Davel. Any such regulatory receipts are deposited into a third-party escrow
account and are used to reimburse the Company for costs incurred. The secured
lenders are not required to fund the escrow account or otherwise reimburse
the
Company for amounts, if any, in excess of actual regulatory receipts collected.
Any amount remaining in the escrow account at the conclusion of the litigation
is to be returned to the former secured lenders. The Company has received
significant regulatory receipts that are being held in escrow. These funds
can
be used to reimburse the Company for costs, including legal fees, incurred
in
the defense or settlement of this litigation. The Company believes that there
are sufficient funds in the escrow account to pay both its legal defense costs
and any potential judgment that the Company believes could reasonably be
expected. This $7.5 million claim represents exposure to the Company in
the event that escrowed regulatory receipts are insufficient to cover any
potential judgment against the Company should it be found liable for the full
monetary amount of the claim.
3)
On
August
6, 2006, the Company was served with a summons and complaint filed in the
Superior Court of the State of Arizona in Maricopa County in the matter
captioned Michael V. Nasco, et. al. vs. MobilePro Corp., et. al. which alleges
claims arising out of the acquisition by the Company of Transcordia, LLC. The
plaintiff alleges claims of breach of contract, fraud, relief rescission,
failure to pay wages and unjust enrichment and seeks damages in excess of $3
million. On or about November 7, 2006, the Company filed a motion to dismiss
arguing lack of standing and corporate existence. Although the Company believes
that its motion to dismiss will be granted, there can be no guarantee that
the
ruling of the court will be favorable to the Company. In the event the motion
to
dismiss is not granted, the Company believes that any potential exposure related
to the claims alleged against the Company is not likely to be
material.
NOTE
12-SEGMENT
INFORMATION
The
Company’s reportable operating segments include voice services, Internet
services and wireless networks. Results of operations and certain asset data
relating to the Company’s business segments for the three months ended September
30, 2006 and 2005 were as follows:
|
|
|
Voice
|
|
|
Internet
|
|
|
Wireless
|
|
|
|
|
|
|
|
2006
|
|
|
Services
|
|
|
Services
|
|
|
Networks
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
16,624,821
|
|
$
|
3,820,520
|
|
$
|
2,965,309
|
|
$
|
—
|
|
$
|
23,410,650
|
|
Cost
of revenues (excludes depreciation and amortization)
|
|
|
9,240,304
|
|
|
2,107,766
|
|
|
1,789,176
|
|
|
—
|
|
|
13,137,246
|
|
Other
operating expenses
|
|
|
6,719,130
|
|
|
1,881,264
|
|
|
2,097,135
|
|
|
1,201,053
|
|
|
11,898,582
|
|
Depreciation
and amortization
|
|
|
857,746
|
|
|
114,188
|
|
|
476,958
|
|
|
—
|
|
|
1,448,892
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
529,736
|
|
|
—
|
|
|
—
|
|
|
529,736
|
|
Restructuring
charges
|
|
|
—
|
|
|
75,835
|
|
|
—
|
|
|
(95,667
|
)
|
|
(19,832
|
)
|
Interest
expense, net
|
|
|
(54,685
|
)
|
|
400
|
|
|
28,755
|
|
|
552,470
|
|
|
526,940
|
|
Net
income (loss)
|
|
$
|
(137,674
|
)
|
$
|
(888,669
|
)
|
$
|
(1,426,715
|
)
|
$
|
(1,657,856
|
)
|
$
|
(4,110,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$
|
25,564,721
|
|
$
|
37,700,937
|
|
$
|
27,842,776
|
|
$
|
1,931,656
|
|
$
|
92,930,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net of accumulated depreciation
|
|
$
|
10,602,126
|
|
$
|
1,329,220
|
|
$
|
7,084,470
|
|
$
|
115,000
|
|
$
|
19,130,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net of impairment
|
|
$
|
20,531,278
|
|
$
|
14,612,831
|
|
$
|
12,075,933
|
|
$
|
—
|
|
$
|
47,220,042
|
|
|
|
Voice
|
|
Internet
|
|
Wireless
|
|
|
|
|
|
2005
|
|
Services
|
|
Services
|
|
Networks
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
19,333,581
|
|
$
|
3,823,619
|
|
$
|
3,389,450
|
|
$
|
—
|
|
$
|
26,546,650
|
|
Cost
of revenues (excludes depreciation and amortization)
|
|
|
8,197,761
|
|
|
1,782,707
|
|
|
1,673,927
|
|
|
—
|
|
|
11,654,395
|
|
Other
operating expenses
|
|
|
8,290,359
|
|
|
1,683,449
|
|
|
1,926,127
|
|
|
580,057
|
|
|
12,479,992
|
|
Depreciation
and amortization
|
|
|
775,316
|
|
|
85,129
|
|
|
183,228
|
|
|
3,646
|
|
|
1,047,319
|
|
Interest
expense, net
|
|
|
7,491
|
|
|
(4,849
|
)
|
|
(
9,128
|
)
|
|
704,821
|
|
|
698,335
|
|
Minority
interests
|
|
|
(35,645
|
)
|
|
—
|
|
|
178,354
|
|
|
—
|
|
|
142,709
|
|
Net
income (loss)
|
|
$
|
2,098,299
|
|
$
|
277,183
|
|
$
|
(563,058
|
)
|
$
|
(1,288,524
|
)
|
$
|
523,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$
|
55,190,207
|
|
$
|
17,897,818
|
|
$
|
10,712,861
|
|
$
|
3,359,932
|
|
$
|
87,160,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net of accumulated depreciation
|
|
$
|
11,740,439
|
|
$
|
1,277,848
|
|
$
|
668,216
|
|
$
|
3,675
|
|
$
|
13,690,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net of impairment
|
|
$
|
21,925,741
|
|
$
|
15,072,519
|
|
$
|
494,219
|
|
|
—
|
|
$
|
37,492,479
|
|
Results
of operations data relating to the Company’s business segments for the six
months ended September 30, 2006 and 2005 were as follows:
|
|
Voice
|
|
Internet
|
|
Wireless
|
|
|
|
|
|
2006
|
|
Services
|
|
Services
|
|
Networks
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
32,708,862
|
|
$
|
8,040,953
|
|
$
|
6,003,621
|
|
$
|
—
|
|
$
|
46,753,436
|
|
Cost
of revenues (excludes depreciation and
amortization)
|
|
|
18,218,877
|
|
|
4,088,228
|
|
|
3,592,099
|
|
|
—
|
|
|
25,899,204
|
|
Other
operating expenses
|
|
|
13,702,829
|
|
|
4,071,954
|
|
|
4,127,422
|
|
|
2,937,937
|
|
|
24,840,142
|
|
Depreciation
and amortization
|
|
|
1,681,436
|
|
|
225,985
|
|
|
872,382
|
|
|
—
|
|
|
2,779,803
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
877,854
|
|
|
—
|
|
|
—
|
|
|
877,854
|
|
Restructuring
charges
|
|
|
—
|
|
|
97,871
|
|
|
—
|
|
|
185,968
|
|
|
283,839
|
|
Interest
expense, net
|
|
|
(188,073
|
)
|
|
982
|
|
|
14,996
|
|
|
1,093,110
|
|
|
921,015
|
|
Net
income (loss)
|
|
$
|
(706,207
|
)
|
$
|
(1,321,921
|
)
|
$
|
(2,603,278
|
)
|
$
|
(4,217,015
|
)
|
$
|
(8,848,421
|
)
|
|
|
Voice
|
|
Internet
|
|
Wireless
|
|
|
|
|
|
2005
|
|
Services
|
|
Services
|
|
Networks
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
37,796,032
|
|
$
|
7,861,019
|
|
$
|
3,395,444
|
|
$
|
—
|
|
$
|
49,052,495
|
|
Cost
of revenues (excludes depreciation and
amortization)
|
|
|
17,251,793
|
|
|
3,738,731
|
|
|
1,685,733
|
|
|
—
|
|
|
22,676,257
|
|
Other
operating expenses
|
|
|
15,231,270
|
|
|
3,436,254
|
|
|
2,154,076
|
|
|
968,631
|
|
|
21,790,231
|
|
Depreciation
and amortization
|
|
|
1,511,859
|
|
|
166,928
|
|
|
183,616
|
|
|
7,293
|
|
|
1,869,696
|
|
Interest
expense, net
|
|
|
8,040
|
|
|
13,616
|
|
|
(9,202
|
)
|
|
1,618,056
|
|
|
1,630,510
|
|
Minority
interests
|
|
|
(35,645
|
)
|
|
—
|
|
|
178,354
|
|
|
—
|
|
|
142,709
|
|
Net
income (loss)
|
|
$
|
3,828,715
|
|
$
|
505,490
|
|
$
|
(797,133
|
)
|
$
|
(2,593,980
|
)
|
$
|
943,092
|
|
Item
2. Management's Discussion and Analysis of Results of Operations and Financial
Condition.
The
following is a discussion and analysis of our results of operations for the
three-month periods ended September 30, 2006 and 2005, our financial condition
at September 30, 2006 and factors that we believe could affect our future
financial condition and results of operations. Historical results may not be
indicative of future performance.
This
discussion and analysis should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Form
10-Q.
Our consolidated financial statements are prepared in accordance with Generally
Accepted Accounting Principles in the United States (“GAAP”). All references to
dollar amounts in this section are in United States dollars.
Forward
Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this document that are
not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act
of 1934, including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding our business, and the level of
our
expenditures and savings for various expense items and our liquidity in future
periods. We may identify these statements by the use of words such as
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and other similar expressions. All forward-looking statements included
in this document are based on information available to us on the date hereof,
and we assume no obligation to update any such forward-looking statements,
except as may otherwise be required by law. Our actual results could differ
materially from those anticipated in these forward-looking
statements.
Overview
We
are a
broadband wireless, telecommunications, and integrated data communication
services company. We deliver a comprehensive suite of voice and data
communications services, including local exchange, long distance, enhanced
data,
Internet, wireless and broadband services to our end-user customers. We are
focused on growing our current customer bases, deploying wireless technologies,
acquiring and growing profitable telecommunications and broadband companies
and
forging strategic and marketing alliances with well positioned companies with
complementary product lines and in complementary industries.
The
adoption of initiatives by cities to create areas within city limits where
residents, visitors, students, and businesses can obtain wireless access to
the
Internet has created an increased interest in so-called wireless access zones.
We are concentrating efforts on the deployment, management and ownership of
such
municipally sponsored wireless access zones. As a result, we are an innovator
in
the deployment of wireless broadband networks and services. Our wireless
broadband networks and services will be provided in our wireless access zones
to
be primarily located in municipality sponsored areas. These network systems
are
scalable and flexible and will be readily modified to offer a variety of
broadband services. Currently, we have eight active projects. Currently, we
are
deriving revenues from our initial deployment in Tempe, Arizona. To
date, material revenues have not been provided from this
business.
We
market
and sell our integrated communications services through 12 branch offices in
eight states and we service over 146,000 billed accounts representing over
234,000 equivalent subscriber lines including approximately 114,000 local and
long-distance telephone lines, 55,000 dial-up lines, 6,000 broadband lines,
4,000 cellular lines and over 17,000 wireless customers. We own and operate
approximately 30,900 payphones located predominantly in 44 states and the
District of Columbia.
Our
revenues are generated through three of our four business reporting
segments:
Wireless
Networks
|
Our
broadband wireless network deployment efforts are being conducted
by our
wholly owned subsidiary, NeoReach, Inc., (“NeoReach”), and its subsidiary,
Kite Networks, Inc. (“Kite Networks,” formerly, NeoReach Wireless, Inc.).
This segment also includes the operations of Kite Broadband, LLC
(“Kite
Broadband”), a wireless broadband Internet service provider located in
Ridgeland, Mississippi.
|
|
|
Voice Services
|
Our
voice services segment is led by CloseCall America, Inc. (“CloseCall”), a
Competitive Local Exchange Carrier (“CLEC”, which is a term applied under
the Telecommunications Act of 1996 to local telephone companies which
compete with incumbent local telephone companies) based in Stevensville,
Maryland; American Fiber Network, Inc. (“AFN”), a CLEC based in Kansas
City, Kansas; and Davel Communications, Inc. (“Davel”), an independent
payphone provider based in Cleveland, Ohio. CloseCall offers our
customers
a full array of telecommunications products and services including
local,
long-distance, 1-800-CloseCall anytime/anywhere calling, digital
wireless,
high-speed telephone (voice over IP), and dial-up and DSL Internet
services. AFN is licensed to provide local access, long distance
and/or
Internet services throughout the United States. Davel is one of the
largest independent payphone operators in the United
States.
|
|
|
Internet Services
|
Our
Internet services segment is led by DFW Internet Services, Inc. (“DFW”,
doing business as Nationwide Internet), an Internet services provider
(“ISP”) based in Irving, Texas, its acquired Internet service provider
subsidiaries and InReach Internet, Inc. (“InReach”), a full service ISP
located in Stockton, California that we acquired on November 1, 2005.
Our
Internet services segment provides dial-up and broadband Internet
access, web-hosting services, and related Internet services to business
and residential customers in over 40 states.
|
|
|
Corporate
|
Our
corporate reporting segment serves as the holding company of the
operating
subsidiaries that are divided among the other three business reporting
segments, provides senior executive and financial management, and
performs
corporate-level accounting, financial reporting, and legal functions.
Occasionally, its employees may provide services to customers resulting
in
the recognition of consulting service
revenues.
|
Revenues
for the reportable business segments for the quarters ended September 30, 2006
and 2005 were as follows:
Business
Segment
|
|
2006
|
|
2005
|
|
Voice
Services
|
|
$
|
16,624,821
|
|
$
|
19,333,581
|
|
Internet
Services
|
|
|
3,820,520
|
|
|
3,823,619
|
|
Wireless
Networks
|
|
|
2,965,309
|
|
|
3,389,450
|
|
Corporate
|
|
|
—
|
|
|
—
|
|
Total
Revenues
|
|
$
|
23,410,650
|
|
$
|
26,546,650
|
|
Revenues
for the reportable business segments for the six months ended September 30,
2006
and 2005 were as follows:
Business
Segment
|
|
2006
|
|
2005
|
|
Voice
Services
|
|
$
|
32,708,862
|
|
$
|
37,796,032
|
|
Internet
Services
|
|
|
8,040,953
|
|
|
7,861,019
|
|
Wireless
Networks
|
|
|
6,003,621
|
|
|
3,395,444
|
|
Corporate
|
|
|
—
|
|
|
—
|
|
Total
Revenues
|
|
$
|
46,753,436
|
|
$
|
49,052,495
|
|
The
revenues for each business segment, expressed as a percentage of total
revenues
for the three months ended September 30, 2006 and 2005, were as
follows:
Business
Segment
|
|
2006
|
|
2005
|
|
Voice
Services
|
|
|
71.0
|
%
|
|
72.8
|
%
|
Internet
Services
|
|
|
16.3
|
|
|
14.4
|
|
Wireless
Networks
|
|
|
12.7
|
|
|
12.8
|
|
Corporate
|
|
|
—
|
|
|
—
|
|
Total
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
The
revenues for each business segment, expressed as a percentage of total
revenues
for the six months ended September 30, 2006 and 2005 were as
follows:
Business
Segment
|
|
2006
|
|
2005
|
|
Voice
Services
|
|
|
70.0
|
%
|
|
77.1
|
%
|
Internet
Services
|
|
|
17.2
|
|
|
16.0
|
|
Wireless
Networks
|
|
|
12.8
|
|
|
6.9
|
|
Corporate
|
|
|
—
|
|
|
—
|
|
Total
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
The
revenues of the voice services business segment are provided by the operations
of Davel, CloseCall and AFN. These companies provided approximately 51.2%,
36.0%
and 12.8% of voice services revenues for the six months ended September 30,
2006, respectively, and approximately 58.7%, 36.7% and 4.6% of voice services
revenues for the six months ended September 30, 2005, respectively. The revenues
of the Internet service provider segment are provided primarily by DFW and
its
consolidated subsidiaries. The revenues of the wireless networks business
segment are provided primarily by the operations of Kite Broadband
The
costs
of the network services that we provide to our customers are comprised primarily
of telecommunications charges, including data transmission and database access,
leased digital capacity charges, circuit installation charges, and activation
charges. The costs of database access, circuits, installation charges and
activation charges are based on fixed fee and/or measured services contracts
with local exchange carriers, inter-exchange carriers and data services
providers. The cost of providing services to our customers also includes
salaries, equipment maintenance and other costs related to the ongoing operation
of our network facilities. Our other operating expenses include costs related
to
sales, marketing, administrative and management personnel; outside legal,
accounting and consulting services; advertising and occupancy expenses; and
other costs of being a publicly traded company, including legal and audit fees,
insurance premiums and board of director fees.
Geographic
Markets
Through
our various businesses, we provide service to customers located throughout
the
United States. However, certain portions of our consolidated business are
concentrated in certain geographic markets. For example, the business of
CloseCall is concentrated in the mid-Atlantic region of the country. Although
Davel has payphones located across the United States, approximately 75%, of
the
payphones are located in warm climate states of the southwest, southeast and
west and approximately 25% of the payphones are located in Midwest, Northwest,
and Northeast sections of the country, with usage during the winter months
reduced by the cold climate. The Internet services business provides service
to
customers that are primarily located in the states of California, Texas,
Arizona, Louisiana, Kansas, Missouri, Wisconsin, and Ohio.
Corporate
History
Substantially,
our business has been built through acquisitions. We expect that future revenue
growth will occur largely through the deployment, ownership and management
of
broadband wireless networks that we expect to provide subscription and
advertising revenues, the consummation of additional acquisitions, and the
growth of our CLEC businesses. We do not expect our payphone or dial-up Internet
businesses to show meaningful growth in future years due to strong industry
trends, which reflect a decline in customer demand for such services. Our
strategy is largely unproven and the revenue and income potential from our
strategy is uncertain. We may encounter risks and difficulties frequently
encountered by companies that have grown rapidly through acquisition, including
the risks described elsewhere in this report. Our business strategy may not
be
successful and we may not be able to successfully address these
risks.
Prior
to
January 2004, we were a development stage company. Although we were incorporated
only six years ago, we have undergone a number of changes in our business
strategy and organization. In June 2001, we focused our business on the
integration and marketing of complete mobile information solutions to meet
the
needs of mobile professionals. In April 2002, we acquired NeoReach and shifted
our focus toward solutions supporting the third generation wireless market
that
provides broadband to allow faster wireless transmission of data, such as the
viewing of streaming video in real time. We shifted our business strategy in
December 2003 with a new management team, expanding significantly the scope
of
our business activity to include Internet access services, local and long
distance telephone services and the ownership and operation of payphones. In
2005, we began to invest in the business of deploying broadband wireless
networks and providing wireless network access services in wireless access
zones
to be primarily located in municipality-sponsored areas. As indicated above,
we
entered these businesses primarily through acquisitions. We have completed
twenty-one (21) acquisitions within the last thirty-three (33) months.
Accordingly, our experience in operating our current businesses is limited.
The
Company has lost money historically. For the fiscal years ended March 31, 2006
and 2005, we incurred net losses of $10,176,407 and $5,359,722, respectively,
and we incurred an additional net loss of $8,848,421 in the six months ended
September 30, 2006.
Mobilepro
Corp. (“Mobilepro”) was incorporated under the laws of Delaware in July 2000
and, at that time, was focused on the integration and marketing of complete
mobile information solutions that satisfied the needs of mobile professionals.
In June 2001, Mobilepro merged with and into CraftClick.com, Inc.
(“CraftClick”), with CraftClick remaining as the surviving corporation. The name
of the surviving corporation was subsequently changed to Mobilepro Corp. on
July
9, 2001. CraftClick had begun to cease its business operations in October 2000,
and ultimately disposed of substantially all of its assets in February
2001.
On
March
21, 2002, Mobilepro entered into an Agreement and Plan of Merger with NeoReach,
a private Delaware company, pursuant to which a newly formed, wholly owned
subsidiary of Mobilepro merged into NeoReach in a tax-free transaction. The
merger was consummated on April 23, 2002. As a result of the merger, NeoReach
is
now a wholly owned subsidiary of Mobilepro.
DFW
is
the principal operating subsidiary within our Internet services division. On
January 20, 2004, we acquired DFW. Since then, we have acquired nine additional
Internet service businesses that operate as subsidiaries of DFW and, on November
1, 2005, we acquired the business of InReach.
On
October 15, 2004, we closed our acquisition of CloseCall, which further
established our presence in the CLEC business. One month later, we closed our
acquisition of Davel. On June 30, 2005, we acquired AFN.
In
June
2005, we participated in the formation of Kite Broadband, a wireless broadband
Internet service provider, resulting in the 51% ownership of this venture.
On
January 31, 2006, we acquired the remaining 49% of Kite Broadband and 100%
of
the outstanding common stock of Kite Networks, Inc.
On
March
31, 2006 we merged Kite Networks with and into NeoReach Wireless, Inc. and
changed the name of the combined entity to Kite Networks, Inc.
Our
principal executive offices are located at 6701 Democracy Boulevard, Suite
202,
Bethesda, MD 20817 and our telephone number at that address is (301) 315-9040.
We maintain a corporate web site at www.mobileprocorp.com. We make available
free of charge through our web site our annual report on Form 10-KSB, quarterly
reports on Form 10-QSB and Form 10-Q, current reports on Form 8-K, and all
amendments to those reports, as soon as reasonably practicable after we
electronically file or furnish such material with or to the SEC. The contents
of
our web site are not a part of this report. The SEC also maintains a web site
at
www.sec.gov that contains reports, proxy statements, and other information
regarding Mobilepro.
Recent
Developments
On
April
20, 2006, we announced our selection by Yuma, Arizona, for the deployment,
ownership and management of a wireless network that will initially cover a
portion of the 106 square mile city limits. Yuma is the third largest city
in
Arizona outside of the Phoenix and Tucson metropolitan areas with an estimated
population of approximately 89,000 residents.
On
August
18, 2006, we announced the signing of a definitive agreement with the city
of
Longmont, Colorado, for the deployment, ownership and management of a city-wide
wireless network, an area covering 22 square miles with approximately 81,000
residents.
The
cities of Chandler and Gilbert, Arizona; Farmers’ Branch, Texas; Akron, Ohio;
and Cuyahoga Falls, Ohio, have also selected us for the proposed deployment,
ownership and management of their planned wireless networks. Currently, we
are
negotiating definitive contracts and/or developing pilot deployments with
certain of these municipalities. The deployment of the network in Farmers’
Branch has been substantially completed. We have begun the deployment of the
network in Chandler. As of September 30, 2006, we had purchased networking
and
related equipment for these networks in the amounts of approximately $1,472,000
and $1,327,000, respectively.
On
June
9, 2006, the Company announced that it would no longer pursue
a
project to establish a wireless broadband network for the City of Sacramento,
California. The Company arrived at this decision after it determined that the
demands made upon the Company by the city of Sacramento during contract
negotiations were inconsistent with the Company’s current business
model and the original award made by the city. Likewise, during the current
quarter, we discontinued negotiations with the prime contractor for the
Brookline, Massachusetts wireless network deployment.
On
June
28, 2006, we signed agreements with an equipment leasing firm in order to
execute a sale/leaseback transaction covering certain of the municipal wireless
network equipment in Tempe, Arizona. The sale of the equipment provided
$2,000,000 in proceeds; the leaseback period is 36 months and includes a
fair-market-value purchase option at the end of the lease term. On October
10,
2006, we signed a master equipment lease agreement with a different lease
financing firm that may provide up to $3 million in lease financing capital
for
future network core infrastructure and certain deployed equipment. See the
Liquidity and Capital Resources section below for additional discussion of
these
leasing transactions.
On
May
19, 2006, the Company’s Standby Equity Distribution Agreement (“SEDA”) with
Cornell Capital Partners, L.P. (“Cornell Capital”) expired following the end of
its two-year term. The Company entered into the SEDA in May 2004 providing,
generally, that Cornell Capital would purchase up to $100 million of the common
stock of Mobilepro over a two-year period, with the time and amount of such
purchases, if any, at the Company’s discretion. The Company drew approximately
$39 million from the SEDA during its two-year term.
On
June
30, 2006, the Company issued the Amended Debenture to Cornell Capital, replacing
the original Debenture. The Debenture was payable in quarterly installments
over
a three-year period with $4,500,000 scheduled to be paid in cash over the year
ending March 31, 2007. Pursuant to the Amended Debenture, the amended principal
amount of $15,149,650 is currently scheduled to be retired at a rate of $250,000
per week, with payments scheduled to commence in mid-November 2006. However,
under certain conditions including Cornell Capital having the statutory ability
to sell the shares in the open market, the Company has the option of making
the
weekly payments in the form of cash or our common stock. Like the Debenture,
the
Amended Debenture bears interest at an annual rate of 7.75%. See the Liquidity
and Capital Resources section below for additional discussion of the Amended
Debenture.
On
August
28, 2006, the Company entered into a financing agreement with Cornell Capital
with the purpose of providing up to $7.0 million in debt financing to the
Company with the proceeds provided in three tranches (the “Tranche Debenture
Agreement”). At the closing of each tranche, the Company will issue Cornell
Capital a 7.75% secured convertible debenture in the principal amount for that
tranche. On August 30, 2006, the Company closed the first tranche in the amount
of $2.3 million, issuing the First Tranche Debenture. Under the terms of this
First Tranche Debenture, the Company is scheduled to make weekly principal
payments of at least $125,000 commencing January 2, 2007, with interest on
the
outstanding principal balance payable at the same time. Under conditions similar
to those included in the Amended Debenture, the Company has the right to make
any and all such principal payments by issuing shares of its common stock to
Cornell Capital. Under an amendment to the Tranche Debenture Agreement signed
on
October 23, 2006, the additional tranches were rescheduled such that $1,175,000
of gross proceeds will be available no later than November 15, 2006, $1,175,000
of gross proceeds will be available on February 1, 2007, and $2,350,000 will
be
available upon the Company successfully registering the conversion shares of
common stock for resale.
The
Company filed a registration statement on Form S-3 on October 12, 2006 including
the shares of our common stock that would be issued pursuant to our making
the
scheduled maturity payments of the Amended and First Tranche Debentures with
shares of common stock. However, we have not yet received clearance from the
SEC
that would allow the registration to be declared effective.
On
August
28, 2006, a leading provider of triple play cable TV, high-speed Internet and
telephone services, RCN Corporation (“RCN”), announced that it had reached a
pilot agreement with the Company whereby RCN will offer cellular service to
its
subscribers supplied by CloseCall America. Under this arrangement, it is
intended that CloseCall America will perform all supporting activities including
sales, provisioning, billing and customer care. The initial trial of this
program was commenced in September 2006 in Boston, Massachusetts. The
arrangement contemplates that upon the occurrence of a successful trial, the
program will be extended to other RCN markets around the country. However,
if
the trial is deemed to be unsuccessful, the relationship would likely be
terminated.
On
July
6, 2006, the Company announced that its Internet gaming subsidiary, ProGames
Network, Inc. (“ProGames”), closed an initial round of financing that provided
$138,500 in gross proceeds under a series of debentures convertible into shares
of common stock of ProGames. The proceeds were used primarily to fund certain
operating costs of ProGames including the development of a web-site. ProGames
was formed in December 2005 in order to pursue select opportunities in the
Internet gaming space including the development of tools, content and
connectivity for online gamers. Under U.S. law, the ability to market “games of
chance” is limited by the federal Wire Act and various state anti-gambling laws.
In the three and six months ended September 30, 2006, Mobilepro expensed
approximately $88,000 and $182,000 in costs associated with the start-up of
this
business.
Management
Opportunities and Challenges
Management
continues to concentrate its efforts on the business development and network
deployment activities of the wireless network business, the consolidation and
integration of the Internet services and voice services businesses, and the
identification and securing of additional sources of growth capital.
As
discussed above, we see opportunity for growth in the emerging market presented
by municipally sponsored broadband wireless networks. Our acquisition strategy
of the last two years has been executed, in part, with the objective of
establishing a viable telecommunications company with sufficient credibility
to
be considered for selection by cities for the deployment, ownership and
management of broadband wireless networks. The effectiveness of our business
plan execution was initially confirmed by the selection by Tempe, Arizona,
of
Kite Networks (formerly NeoReach Wireless) for its network. Subsequently, we
were selected by nine other cities for the deployment, ownership, and management
of such networks. However, as discussed above, the Company withdrew from the
Sacramento, California, and Brookline, Massachusetts, deployment projects during
contract negotiation.
The
ramp-up time from selection to the completion of deployment can exceed six
months. As a result, we have incurred significant costs related to this business
before any significant revenues are expected. Operating costs for Kite Networks
were approximately $1,960,000 in the year ended March 31, 2006, and
approximately $1,149,000 in the six months ended September 30, 2006. The capital
equipment costs for the Tempe network exceeded $2,800,000. As of September
30,
2006, we had purchased networking equipment for the Farmers’ Branch and Chandler
networks in the amounts of approximately $1,472,000 and $1,327,000,
respectively. The transmission equipment being installed by us incorporates
certain new technologies that are largely untested in these types of networks.
Should functionality prove to be ineffective, we may be required to make
additional expenditures to upgrade or replace equipment that has already been
installed. In order to fund the equipment costs and operating expenses of this
business, we are required to obtain investment capital from external sources.
The cash flow from the operations of the voice and Internet services business
is
not sufficient to fully fund this business.
Many
of
the companies that we have acquired are experiencing declining revenues as
we
expected. Over 80% of the customers of our Internet services business are
subscribers to dial-up service. The revenues of this business segment have
declined from a level of approximately $4,037,000 for the three months ended
June 30, 2005 to approximately $2,725,000 (before the addition of InReach
revenues) for the three months ended September 30, 2006, a decline of
approximately 32.4%. Likewise, the pay telephone business is declining due
primarily to the public’s increasing usage of competitive technologies. Revenues
for Davel for the quarter ended September 30, 2006 were approximately $8,565,000
compared with revenues of approximately $11,060,000 for the prior year quarter,
a decline of 22.6%. The declining revenues of these businesses, without a
corresponding decrease in the cost of such services, and the operating costs
of
Kite Networks discussed above are adversely affecting our operating
profitability.
During
the three months ended December 31, 2005, both the Internet service provider
segment and the voice services segment incurred operating losses that were
not
expected. As a result, we reviewed the carrying values of the assets of these
segments and determined that an adjustment for goodwill impairment was
appropriate at December 31, 2005. We recorded an impairment charge in the amount
of $3,764,429, including $1,945,519 related to the Internet service provider
companies and $1,818,910 related to Affinity. We experienced a significant
and
steady loss of Affinity customers, and Affinity incurred bad debt losses at
a
greater rate than in our other CLEC companies. The negative customer churn
of
dial-up ISP customers has exceeded our expectations, contributing to the net
losses incurred by this segment during the most recent four quarters. As a
result, we have recorded additional impairment charges related to the ISP
companies in the amounts of $682,116, $348,118 and $529,736 in the quarters
ended March 31, 2006, June 30, 2006 and September 30, 2006, respectively. Future
assessments of the acquisition fair values could identify material impairment
losses resulting in substantial additional write-offs of goodwill. Such
adjustments could have material adverse non-cash effects on our results of
operations and our financial position.
In
order
to attain and to sustain the profitability of our Internet and voice services
businesses, last year we began a project to consolidate these operations that
we
expect to substantially complete during fiscal 2007. In connection with this
project, we recorded a restructuring charge of $825,703 in the fiscal year
ended
March 31, 2006, and an additional charge of $303,671 in the quarter ended June
30, 2006, with the charges relating to employee terminations, fixed asset
disposals and leased facilities. As additional employee terminations occur,
we
may record additional charges for restructuring costs during the remainder
of
fiscal 2007. These amounts have not yet been determined.
A
major
challenge is the pursuit of new financing in order to fund the build out of
our
municipal wireless networks, to support the operating expenses of the wireless
networks business and to provide funds for potential future acquisitions.
Because of the Company’s negative cash flows, the lack of a significant credit
history and the difficulties that we are experiencing in registering our
securities with the SEC, establishing alternative sources of growth capital
on
terms that would be considered conventional is proving to be difficult.
Nonetheless, as described above, in the current year, we have entered into
two
lease financing arrangements for the purchase of certain municipal wireless
network equipment, and we have obtained extended payment terms from an
alternative provider of wireless network transmission equipment that we are
using in connection with the Longmont, Colorado, deployment. In addition,
Cornell Capital has provided funding and amended the payment terms of the
debentures in recognition of the Company’s tight cash position (see the
discussion of the Amended Debenture and the Tranche Debenture Agreement above).
In
order
to register previously issued unregistered shares for resale and thereby create
liquidity for the selling stockholders identified therein, we filed a
registration statement on Form S-3 on October 12, 2006 after withdrawing our
Form SB-2. The Company had previously amended the Form SB-2 on five occasions
in
attempts to respond to a series of comment letters received from the SEC. At
the
date of this filing, we are preparing a response to the comment letter recently
recieved from the SEC concerning the registration statement on Form S-3.
We
believe that we will be successful in securing additional alternative financing
in the future. With that belief, we did not pursue an extension or renewal
of
the SEDA that expired in May 2006. As discussed elsewhere in this document,
raising capital is a time intensive and risky process, and there can be no
assurance that we will be successful in securing additional financing in the
future.
Critical
Accounting Policies
We
believe there have been no significant changes in our critical accounting
policies during the current year as compared to what was previously disclosed
in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2006.
We
consider the accounting policies related to revenue and related cost
recognition, the valuation of goodwill and other intangible assets and the
accounting for transactions related to our debt and equity financing activity
to
be critical to the understanding of our results of operations. Critical
accounting policies include the areas where we have made what we consider to
be
particularly subjective or complex judgments in making estimates and where
these
estimates can significantly impact our financial results under different
assumptions and conditions. We prepare our financial statements in conformity
with U.S. generally accepted accounting principles. As such, we are required
to
make certain estimates, judgments, and assumptions that we believe are
reasonable based upon the information available. These estimates, judgments,
and
assumptions affect the reported amounts of assets and liabilities at the date
of
the financial statement and the reported amounts of revenue and expenses during
the periods presented. Actual results could be different from these
estimates.
New
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board revised its
pronouncements covering the accounting for share-based compensation
arrangements. The revision, referred to as SFAS 123R, was entitled “Share-Based
Payment.” This revised pronouncement replaced SFAS No. 123, “Accounting for
Certain Transactions Involving Stock Compensation, as amended (“SFAS 123”) and
superseded APB No. 25, “Accounting for Stock Issued to Employees.” The scope of
SFAS 123R encompasses a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights and employee share purchase plans.
SFAS
123R
requires that the compensation cost relating to share-based payment transactions
be recorded in financial statements. For each transaction, compensation cost
is
to be measured based on the fair value of the equity or liability instrument
issued. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition of compensation
expense. We have adopted SFAS 123R in the current year. As a result, we recorded
compensation expense in the amounts of $485,091 and $471,556 for the first
and
second quarters of the current year that are included in the condensed
consolidated results of operations for the three and six months ended September
30, 2006.
Results
of Operations and Financial Condition
We
note
that effective analysis of our operations with an approach of comparing results
for a current period with the results of a corresponding prior period may be
difficult due to the number of acquisitions that we have completed and the
significant number of shares of our common stock that we have issued to the
former owners of acquired companies and Cornell Capital. In order to analyze
ourselves, we focus not only on achieving increasing amounts of net income
and
Adjusted EBITDA, but emphasize the change of net income/(loss) per
share.
The
Three Months Ended September 30, 2006 and 2005
Total
Revenues
We
reported consolidated revenues of $23,410,650 in the quarter ended September
30,
2006 compared with revenues of $26,546,650 in the prior year quarter, a decrease
of 11.8%. Since April 1, 2004, we have completed the acquisition of 19 companies
that together have provided significant revenues to us in all three operating
segments. The most significant portions of our revenues are provided by our
CloseCall and Davel subsidiaries that were acquired in October 2004 and November
2004, respectively. As a result, revenues for these companies were included
in
our consolidated results of operations for the quarters ended September 30,
2006
and 2005. Major acquisitions in the prior year included AFN, acquired on June
30, 2005, and InReach, acquired on November 1, 2005. We also obtained a 51%
ownership interest in Kite Broadband in June 2005; this entity commenced
operations on July 1, 2005 (in January 2006 we subsequently acquired the
remaining 49% of Kite Broadband and 100% interest in Kite Networks). The
revenues of these new entities were included in our consolidated results of
operations from those dates. Despite the addition of the revenues from InReach
and the increase in revenues for AFN and Kite Networks, consolidated revenues
declined between years. The amounts of revenues for each company that were
included in our consolidated revenues for the quarters ended September 30,
2006
and 2005 were as follows.
Company
|
|
2006
|
|
2005
|
|
Change
|
|
Davel
|
|
$
|
8,564,757
|
|
$
|
11,023,391
|
|
$
|
(2,458,634
|
)
|
CloseCall
(includes Affinity)
|
|
|
5,923,077
|
|
|
6,677,701
|
|
|
(754,624
|
)
|
Kite
Broadband
|
|
|
2,893,582
|
|
|
3,385,314
|
|
|
(491,732
|
)
|
DFW
(Nationwide)
|
|
|
2,725,120
|
|
|
3,823,619
|
|
|
(1,098,499
|
)
|
AFN
(includes US1)
|
|
|
2,136,987
|
|
|
1,632,488
|
|
|
504,499
|
|
InReach
|
|
|
1,095,400
|
|
|
—
|
|
|
1,095,400
|
|
Kite
Networks
|
|
|
71,727
|
|
|
4,137
|
|
|
67,590
|
|
Total
Revenues
|
|
$
|
23,410,650
|
|
$
|
26,546,650
|
|
$
|
(3,136,000
|
)
|
Voice
Services.
We
deliver voice communications services to end users on a retail basis principally
though this business segment. Revenues from our voice services segment for
the
quarters ended September 30, 2006 and 2005 were $16,624,821, or 71.0% of
consolidated revenues, and $19,333,581, or 72.8% of consolidated revenues,
respectively, representing a 14.0% decline between years. Revenues of this
segment are provided by Davel, CloseCall and AFN. This group derives most of
its
operating revenues from recurring monthly charges, coin revenue and
“dial-around” revenues (intercarrier compensation paid to us by the providers of
800 numbers at the rate of 49.4 cents per call) that are generated by our
communications services. The decrease in revenues between years is primarily
attributable to the decline in the payphone revenues of Davel.
The
proliferation of cell phone use by consumers has caused a continuous reduction
in the use of payphones. As presented above, the revenues for Davel for the
quarter ended September 30, 2006 were $8,564,757 compared with revenues of
approximately $11,023,391 for the prior year, a decline of approximately 22.3%
between years. In an attempt to maintain profitability, we have reduced the
number of payphones by removing those phones receiving minimal use and thereby
eliminating the costs to support and maintain those phones. For example, Davel
had an average of 32,135 payphones in operation during the quarter ended
September 30, 2006, compared with an average of 36,754 payphones in operation
during the quarter ended September 30, 2005, a decline of approximately 12.6%.
The average monthly revenues per average payphone for the quarters ended
September 30, 2006 and 2005 were $88.84 and $99.97, respectively, representing
a
decline of 11.1% between years.
The
local
and long distance service revenues of CloseCall are being negatively affected
by
a continued decline in rates and competitive pressures to bundle services
together and to provide long distance minutes of use within local service
product offerings. Our existing base of business of long distance minutes is
also subject to increasing competition from both VoIP and competing wireless
service offerings. As a result, the business of CloseCall declined in the
quarter, experiencing a reduction in quarterly revenues of approximately 11.3%
compared with the prior year quarter. In order to reduce the amount of net
negative customer churn, we are increasing the promotion of our brand and our
bundled service offerings. In addition, we plan to reduce the net negative
churn
in customers by increasing our advertising and promotional activities and by
continuing to focus on superior customer service. In addition, we expect
CloseCall’s revenues from the delivery of cellular telephone services to
increase during the remainder of the year as the result of the recently
announced relationship with RCN whereby CloseCall would provide such service
to
RCN customers.
On
the
other hand, the business of AFN has grown. Revenues were $2,136,987 for the
current quarter, or 9.1% of consolidated revenues, compared with revenues for
the prior-year quarter of $1,632,488, or 6.1% of consolidated revenues,
representing an increase in revenues of 30.9% between years. The increase in
revenues is attributable primarily to increased volumes with its business
customers.
Internet
Services.
We
deliver data communications services to end users on a retail basis principally
though this business segment. Revenues from Internet services for the quarters
ended September 30, 2006 and 2005 were $3,820,520, or 16.3% of consolidated
revenues, and $3,823,619, or 14.4% of consolidated revenues, respectively,
representing a decline of less than 1% between years. However, current year
revenues included $1,095,400 in revenues attributable to InReach, a company
that
we acquired on November 1, 2005. As stated above, the loss of customers by
this
business, which include mostly dial-up Internet access subscribers, has exceeded
our expectations thus contributing to the goodwill impairment losses recorded
in
each of the last four quarters. In order to attempt to reverse the future loss
of revenues, we are focused on the retention of existing subscribers through
the
improvements in the quality of the Internet service offerings and customer
support. To that end, we recently gave Lisa Bickford, the former general manager
of InReach, the operational responsibility for the entire Internet service
provider business.
Wireless
Networks.
The
revenues of this operating segment principally relate to Kite Broadband. Kite
Broadband’s revenues for the quarters ended September 30, 2006 and 2005 were
$2,893,582, or 12.4% of consolidated revenues, and $3,385,314, or 12.8% of
consolidated revenues, respectively. Since its formation, the number of Kite
Broadband customers has declined by approximately 14.8%. Through improvements
in
the quality of the service, we expect to increase our customer retention rate
and achieve a slight increase in the quarterly revenues of Kite Broadband’s
business in the remainder of fiscal 2007. Although the revenues of Kite Networks
for the current quarter represented less than 1% of consolidated revenues,
they
include the revenues derived from the initial operations of the wireless network
in Tempe, Arizona. Such revenues increased to $71,727 for the quarter ended
September 30, 2006 from $55,314 for the quarter ended June 30, 2006.
Corporate.
From
time
to time, the corporate segment generates miscellaneous revenues. No such
revenues were generated by this segment in the current or prior year
periods.
Operating
Costs and Expenses
Total
operating costs and expenses for the quarters ended September 30, 2006 and
2005,
were $26,994,624 and $25,181,706, respectively, representing approximately
115%
and 95% of consolidated revenues for the respective periods. Excluding cost
of
services, such costs were $13,857,378 and $13,527,311, respectively,
representing approximately 59% and 51% of consolidated revenues for the
respective periods. Further, excluding depreciation, amortization, stock
compensation and charges relating to goodwill impairment and restructuring,
such
operating expenses were $11,427,026 and $12,479,992, respectively, representing
approximately 49% and 47% of consolidated revenues for the respective periods.
These operating expenses have been reduced by $1,052,966 between years, or
8.4%,
due primarily to our restructuring activities that are reducing compensation
and
other related general and administrative costs. Such expenses were approximately
$12.0 million in the first quarter of the current year.
Depreciation
and amortization expenses were $1,448,892 and $1,047,319 in the quarters ended
September 30, 2006 and 2005, respectively. The increase between quarters is
due
primarily to current-quarter depreciation on municipal wireless network
equipment in the amount of $209,703.
Costs
of
services were $13,137,246 and $11,654,395, respectively, in the quarters ended
September 30, 2006 and 2005, an increase of approximately 12.7% between
quarters. These costs, expressed as a percentage of revenues for the
corresponding periods, were 56.1% and 43.9%, respectively, for the current
and
prior-year quarters. The increase in the dollars of such costs between quarters
was due primarily to the additional costs of AFN, InReach and Kite Networks.
The
comparable businesses of Davel, CloseCall, DFW and Kite Broadband all
experienced increases in such costs, expressed as percentages of corresponding
revenues, since costs related to network lines and circuits could not be reduced
enough to keep pace with the declining revenues.
An
analysis of the change between quarters in net consolidated operating expenses
follows:
Net
consolidated operating expenses, quarter ended September 30,
2005
|
|
$
|
12,479,992
|
|
Operating
expenses of InReach
|
|
|
575,214
|
|
Operating
expenses of comparable businesses
|
|
|
(1,721,261
|
)
|
Stock
compensation charge (adoption of SFAS 123R)
|
|
|
471,556
|
|
Goodwill
impairment charge
|
|
|
529,736
|
|
Restructure
charge
|
|
|
(19,832
|
)
|
ProGames
costs
|
|
|
93,081
|
|
Net
consolidated operating expenses, quarter ended September 30,
2006
|
|
$
|
12,408,486
|
|
|
|
|
|
|
Net
consolidated operating expenses above
|
|
$
|
12,408,486
|
|
Cost
of services
|
|
|
13,137,246
|
|
Depreciation
and amortization
|
|
|
1,448,892
|
|
Consolidated
operating costs and expenses, quarter ended September
30, 2006
|
|
$
|
26,994,624
|
|
Interest
Expense
Interest
expense, net, was $526,940 for the quarter ended September 30, 2006 compared
with $698,335 in the prior year. During the first quarter of the current year,
we completed the retirement of our notes payable to Cornell Capital. During
the
second quarter of the current fiscal year, we issued a new debenture to Cornell
Capital in the amount of $2.3 million, bearing stated interest at 7.75%.
The
major
components of net interest expense for quarters ended September 30, 2006 and
2005 are presented in the following schedule.
Type
of Debt
|
|
2006
|
|
2005
|
|
Notes
payable to Cornell Capital
|
|
$
|
—
|
|
$
|
198,049
|
|
SEDA
draw discounts
|
|
|
—
|
|
|
142,847
|
|
Convertible
debentures (at stated rate)
|
|
|
312,541
|
|
|
302,781
|
|
Discount
amortization amounts
|
|
|
149,115
|
|
|
100,376
|
|
Other,
net
|
|
|
65,284
|
|
|
(45,718
|
)
|
Interest
Expense, net
|
|
$
|
526,940
|
|
$
|
698,335
|
|
Net
Loss
We
reported a net loss of $4,110,914 for the quarter ended September 30, 2006,
or
$0.0070 per share, compared with net income of $523,900, or $0.0012 per diluted
share, for the prior year quarter. The loss was due primarily to the reduction
in revenues, the increase in the cost of services, depreciation and
amortization, and certain other non-cash charges. The current quarter results
included non-cash charges related to goodwill impairment, restructuring and
stock compensation that totaled $981,460; no such charges were included in
the
prior-year quarter. The voice services segment incurred a net loss of $137,674
for the current quarter compared with net income of $2,098,299 in the prior
year
quarter as revenues declined by approximately 14.0% without a corresponding
decrease in the cost of services. The Internet service segment incurred a net
loss of $888,669 for the current quarter compared with net income of $277,183
in
the prior year quarter. Although the addition of InReach enabled this segment
to
maintain its level of revenues between years, the cost of services and other
operating expenses increased. In addition, a goodwill impairment charge of
$529,736 was recorded in the current quarter related the DFW group of companies.
Net losses incurred by both Kite Broadband and Kite Networks primarily caused
the net loss of $1,426,715 reported by the wireless networks segment for the
current quarter as revenues declined by approximately 12.5% without a
corresponding decrease in the cost of services. Corporate expenses were
$1,657,856 in the current quarter, including $471,556 in stock compensation
and
$93,081 in ProGames expenses, offset by a reduction in interest expense;
corporate expenses were $1,288,524 in the prior-year quarter.
The
Six Months Ended September 30, 2006 and 2005
Total
Revenues
We
reported consolidated revenues of $46,753,436 in the six months ended September
30, 2006 compared with revenues of $49,052,495 in the prior year period, a
decrease of 4.7%. The current year results include the revenues of AFN and
Kite
Broadband for two quarters (the prior-year results include only one quarter)
and
the revenues of InReach. However, the revenues of each of the significant
comparable companies, Davel, CloseCall, and DFW, declined between years. The
amounts of revenues for each company that were included in our consolidated
revenues for the six months ended September 30, 2006 and 2005 were as follows.
Company
|
|
2006
|
|
2005
|
|
Change
|
|
Davel
|
|
$
|
16,762,255
|
|
$
|
22,187,052
|
|
$
|
(5,424,797
|
)
|
CloseCall
(includes Affinity)
|
|
|
11,778,334
|
|
|
13,852,722
|
|
|
(2,074,388
|
)
|
Kite
Broadband
|
|
|
5,876,580
|
|
|
3,385,314
|
|
|
2,491,266
|
|
DFW
(Nationwide)
|
|
|
5,705,958
|
|
|
7,861,019
|
|
|
(2,155,061
|
)
|
AFN
(includes US1)
|
|
|
4,168,273
|
|
|
1,756,258
|
|
|
2,412,015
|
|
InReach
|
|
|
2,334,995
|
|
|
-
|
|
|
2,334,995
|
|
Kite
Networks
|
|
|
127,041
|
|
|
10,130
|
|
|
116,911
|
|
Total
Revenues
|
|
$
|
46,753,436
|
|
$
|
49,052,495
|
|
$
|
(2,299,059
|
)
|
Operating
Costs and Expenses
Total
operating costs and expenses for the six months ended September 30, 2006 and
2005, were $54,271,241 and $46,336,184, respectively, representing approximately
116% and 94% of consolidated revenues for the corresponding periods. Excluding
cost of services, such costs were $28,372,037 and $23,659,927, respectively,
representing approximately 61% and 48% of consolidated revenues for the
corresponding periods. Further, excluding depreciation, amortization, stock
compensation and charges relating to goodwill impairment and restructuring,
such
operating expenses were $23,473,894 and $21,790,231, respectively, representing
approximately 50% and 44% of consolidated revenues for the corresponding periods
despite the reduction of $1,052,966 in such costs in the current quarter
compared with the prior year.
Depreciation
and amortization expenses were $2,779,803 and $1,869,696 in the six months
ended
September 30, 2006 and 2005, respectively. The increase between quarters is
due
primarily to current-year depreciation on municipal wireless network equipment
in the amount of $373,362, and the inclusion of the depreciation and
amortization of Kite Broadband for the full six months of the current year
period ($469,221), including amortization related to the Sprint contract (see
Notes 2 and 6 to the condensed consolidated financial statements included
herein). The prior-year period included only three months of depreciation and
amortization for Kite Broadband ($181,563).
Costs
of
services were $25,899,204 and $22,676,257, respectively, in the six months
ended
September 30, 2006 and 2005, an increase of approximately 14.2% between years.
These costs, expressed as a percentage of revenues for the corresponding
periods, were 55.4% and 46.2%, respectively, for the current and prior-year
periods. The increase in the dollars of such costs between quarters was due
primarily to the additional costs of AFN, Kite Broadband, InReach and Kite
Networks. The comparable businesses of Davel, CloseCall, and DFW all experienced
decreases in such costs between years. However, such costs, expressed as
percentages of corresponding revenues, increased between years as costs related
to network lines and circuits could not be reduced to keep pace with the
declining revenues.
An
analysis of the change between years in net consolidated operating expenses
follows:
Net
consolidated operating expenses, six months ended September 30,
2005
|
|
$
|
21,790,231
|
|
Operating
expenses of acquired companies
|
|
|
3,215,965
|
|
Operating
expenses of comparable businesses
|
|
|
(1,879,693
|
)
|
Stock
compensation charge (adoption of SFAS 123R)
|
|
|
956,647
|
|
Goodwill
impairment charges
|
|
|
877,854
|
|
Restructure
charges
|
|
|
283,839
|
|
Write-off
of investment banking fees
|
|
|
165,886
|
|
ProGames
costs
|
|
|
181,505
|
|
Net
consolidated operating expenses, six months ended September 30,
2006
|
|
$
|
25,592,234
|
|
|
|
|
|
|
Net
consolidated operating expenses above
|
|
$
|
25,592,234
|
|
Cost
of services
|
|
|
25,899,204
|
|
Depreciation
and amortization
|
|
|
2,779,803
|
|
Consolidated
operating costs and expenses, six months ended September
30, 2006
|
|
$
|
54,271,241
|
|
Interest
Expense
Interest
expense, net, was $921,015 for the six months ended September 30, 2006 compared
with $1,630,510 in the prior year. During the first quarter of the current
year,
we completed the retirement of our notes payable to Cornell Capital and allowed
the term of the SEDA to expire. During the second quarter of the current fiscal
year, we issued a new debenture to Cornell Capital in the amount of $2.3
million, bearing stated interest at 7.75%. The prior year included interest
expense related to a bridge loan payable to Airlie Opportunity Fund that was
refinanced in May 2005.
The
major
components of net interest expense for six months ended September 30, 2006
and
2005 are presented in the following schedule.
Type
of Debt
|
|
2006
|
|
2005
|
|
Notes
payable to Cornell Capital
|
|
$
|
25,074
|
|
$
|
432,361
|
|
SEDA
draw discounts
|
|
|
137,795
|
|
|
237,805
|
|
Convertible
debentures (at stated rate)
|
|
|
602,370
|
|
|
460,753
|
|
Discount
amortization amounts
|
|
|
246,254
|
|
|
150,565
|
|
Airlie
bridge loan
|
|
|
—
|
|
|
381,225
|
|
Other,
net
|
|
|
(90,478
|
)
|
|
(32,199
|
)
|
Interest
Expense, net
|
|
$
|
921,015
|
|
$
|
1,630,510
|
|
Net
Loss
We
reported a net loss of $8,848,421 for the six months ended September 30, 2006,
or $0.0151 per share, compared with net income of $943,092, or $0.0023 per
diluted share, for the prior year period. The current year results included
charges for stock compensation, goodwill impairment and restructuring that
totaled $2,118,340, and a loss incurred on the extinguishment of debt in the
amount of $409,601 (see Note 7 to the condensed consolidated financial
statements). The voice services segment incurred a net loss of $706,207 for
the
current year compared with net income of $3,828,715 in the prior year as
revenues declined by approximately 13.5% while the total cost of services for
the segment increased. Despite a 2.2% increase in segment revenues between
years, the Internet services business incurred a net loss of $1,321,921 for
the
current year compared with net income of $505,490 in the prior year as operating
expenses (including the costs incurred by InReach) increased between years
and
goodwill impairment and restructuring charges of $877,854 and $97,871,
respectively, were recorded in the current year. Net losses incurred by both
Kite Broadband and Kite Networks caused the net loss of $2,603,278 reported
by
the wireless networks segment for the current year, relating primarily to the
start-up of the municipal wireless business. Corporate expenses were $4,217,015
in the current year, including $956,647 in stock compensation, $185,968 in
restructuring charges, the loss on extinguishment of debt of $409,601, the
write-off of the investment banking fees in the amount of 165,886, and $181,505
in ProGames organizational costs. Such increases were partially offset by a
substantial reduction in net interest expense between years as presented above.
Adjusted
EBITDA Presentation
EBITDA
represents net income (loss) before interest, taxes, depreciation and
amortization, and in the case of Adjusted EBITDA, before goodwill impairment,
restructuring charges and other non-operating costs. Adjusted EBITDA is not
a measurement of financial performance under GAAP. However, we have included
data with respect to Adjusted EBITDA because we evaluate and project the
performance of our business using several measures, including Adjusted EBITDA.
The
computations of Adjusted EBITDA for the quarters ended September 30, 2006
and 2005 were as follows.
|
|
2006
|
|
2005
|
|
Net
income/(loss)
|
|
$
|
(4,110,914
|
)
|
$
|
523,900
|
|
Add
non-EBITDA items included in net
|
|
|
|
|
|
|
|
results:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,448,892
|
|
|
1,047,319
|
|
Interest
expense, net
|
|
|
526,940
|
|
|
698,335
|
|
Goodwill
impairment and restructuring
|
|
|
|
|
|
|
|
charges
|
|
|
509,904
|
|
|
—
|
|
Stock
compensation expense
|
|
|
471,556
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
(1,153,622
|
)
|
$
|
2,269,554
|
|
The
computations of Adjusted EBITDA for the six months ended September 30, 2006
and 2005 were as follows.
|
|
2006
|
|
2005
|
|
Net
income/(loss)
|
|
$
|
(8,848,421
|
)
|
$
|
943,092
|
|
Add
non-EBITDA items included in net
|
|
|
|
|
|
|
|
results:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,779,803
|
|
|
1,869,696
|
|
Interest
expense, net
|
|
|
921,015
|
|
|
1,630,510
|
|
Goodwill
impairment, restructuring
|
|
|
|
|
|
|
|
charges
and write-offs
|
|
|
1,416,003
|
|
|
—
|
|
Stock
compensation expense
|
|
|
956,647
|
|
|
—
|
|
Loss
on debt extinguishment
|
|
|
409,601
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$
|
(2,365,352
|
)
|
$
|
4,443,298
|
|
We
consider Adjusted EBITDA to be an important supplemental indicator of our
operating performance, particularly as compared to the operating performance
of
our competitors, because this measure eliminates many differences among
companies in financial, capitalization and tax structures, capital investment
cycles and ages of related assets, as well as certain recurring non-cash and
non-operating items. We believe that consideration of Adjusted EBITDA should
be
supplemental, because Adjusted EBITDA has limitations as an analytical financial
measure. These limitations include the following: Adjusted EBITDA does not
reflect our cash expenditures, or future requirements for capital expenditures
or contractual commitments; Adjusted EBITDA does not reflect the interest
expense, or the cash requirements necessary to service interest or principal
payments, on our indebtedness; although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized will often have
to
be replaced in the future, and Adjusted EBITDA does not reflect any cash
requirements for such replacements; Adjusted EBITDA does not reflect the effect
of earnings or charges resulting from matters we consider not to be indicative
of our ongoing operations; and not all of the companies in our industry may
calculate EBITDA in the same manner in which we calculate Adjusted EBITDA,
which
limits its usefulness as a comparative measure.
Management
compensates for these limitations by relying primarily on its GAAP results
to
evaluate its operating performance and by considering independently the economic
effects of the foregoing items that are not reflected in Adjusted EBITDA. As
a
result of these limitations, Adjusted EBITDA should not be considered as an
alternative to net income (loss), as calculated in accordance with generally
accepted accounting principles, as a measure of operating performance, nor
should it be considered as an alternative to cash flows as a measure of
liquidity.
Further,
we realize that effective analysis of our operations with an approach of
comparing results for a current period with the results of a corresponding
prior
period may be difficult due to the significant number of acquisitions and stock
issues that we have completed. In order to analyze ourselves, we focus not
only
on achieving increasing amounts of net income and Adjusted EBITDA, but strive
to
increase net income per share.
Liquidity
and Capital Resources
During
the six months ended September 30, 2006, our balance of unrestricted cash and
cash equivalents decreased by $2,114,763 to $3,283,118.
Net
cash
used in operations during the six months ended September 30, 2006 was
$3,876,369, reflecting the funding of operating expenses incurred by the Company
and including a significant reduction of $2,766,062 in the total amount of
accounts payable and accrued liabilities. Partially offsetting these factors
was
a $1,390,429 reduction in the balance of accounts receivable during the current
year as, based on revenues for the respective preceding quarters, we reduced
days sales in receivables to 35.7 days at September 30, 2006 from 39.8 days
at
March 31, 2006.
We
used
net cash of $3,338,296 in connection with investing activities during the
current year. We made capital expenditures during the current year totaling
$4,543,094 including approximately $3,297,000 related to the deployment of
municipal wireless networks. Net cash proceeds of $1,300,000 were provided
from
the sale of certain wireless network equipment in Tempe (see additional
discussion of this sale/leaseback transaction below).
Our
financing activities during the current year provided net cash of $5,099,902.
Cash provided to us from the sale of common stock, primarily sales to Cornell
Capital pursuant to the SEDA, totaled $6,660,652. Cash proceeds received from
the issuance of convertible debentures were $2,438,500. During the current
year,
we used cash to make payments reducing the balance of notes payable and other
debt amounts. The net reduction was $3,823,250 including the payment of the
balance of notes payable to Cornell Capital in the amount of
$3,600,000.
We
expect
that our future cash flows from operations will not be adequate to meet our
anticipated cash needs in fiscal 2007. Most important, we estimate that
aggregate capital expenditures of approximately $18-$22 million will be required
in order to complete the municipal wireless network deployments awarded to
us to
date. In order to support the municipal wireless network business operations,
to
complete the deployment of these wireless networks, and to pursue one or more
significant strategic acquisitions, we will need to incur additional debt or
issue additional equity. Our expectation for the Company’s revenue-producing
businesses is that they will achieve at least an aggregate breakeven cash flow
from operations and cover corporate expenses. Notwithstanding our expectation,
that did not occur in the three or six months ended September 30, 2006. A
further decline in our revenue-generating businesses will increase our need
for
cash.
On
May
19, 2006, the SEDA expired without renewal. The SEDA was important to the growth
of our Company. However, we came to believe that the potential additional
issuances of common stock pursuant to the SEDA resulted in an overhang that
was
depressive to the trading price of our common stock. We also believe that less
expensive financing alternatives may be available to the Company. However,
the
successful pursuit of alternative sources of capital has been very difficult.
Our group of businesses, our history of net losses, our lack of a corporate
credit history with significant suppliers and the long paybacks associated
with
investments in municipal wireless networks have proven to be significant
obstacles to overcome in our search for capital. Nonetheless, we continue to
pursue the close of a transaction or series of transactions that we believe
will
enable us to continue with the execution of our business plan for fiscal year
2007.
Cornell
Capital has continued to support the Company. On June 30, 2006, we entered
into
an amended 7.75% secured convertible debenture in the amount of $15,149,650
with
Cornell Capital, replacing the convertible debenture with an outstanding
principal amount of $15,000,000 (and accrued interest payable at June 30, 2006
of approximately $149,650) that was issued to Cornell Capital in May 2005.
Under
the terms of the Amended Debenture, we have agreed to make weekly scheduled
principal payments of at least $250,000 commencing in mid-November 2006 with
interest on the outstanding principal balance payable at the same time. We
have
the right to make any and all such principal payments by issuing shares of
our
common stock to Cornell Capital provided that
such
shares are tradable under Rule 144 of the Securities Act of 1933 (the
“Securities Act”), are registered for sale under the Securities Act or are
freely tradable by Cornell Capital without restriction. The
amount of such shares shall be based upon the lower of $0.275 per share or
93%
of the average of the two lowest daily volume weighted average per share prices
of our common stock during the five days immediately following the scheduled
payment date. Cornell Capital may convert all or any part of the unpaid
principal and accrued interest owed under the Amended Debenture into shares
of
our common stock at a conversion price of $0.275 per share. The Amended
Debenture eliminated the requirement to renew the SEDA and is secured by a
blanket lien on our assets. With the issuance of the Amended Debenture, we
believe that we have deferred a cash requirement of $4,500,000 (the amount
of
the scheduled principal payments in the twelve month period ending March 31,
2007) relating to fiscal year 2007.
On
August
28, 2006, the Company entered into a financing agreement with Cornell Capital
providing up to $7.0 million in debt financing with the proceeds provided in
three tranches (the “Tranche Debenture Agreement”). At the closing of each
tranche, the Company will issue Cornell Capital a 7.75% secured convertible
debenture in the principal amount for that tranche, convertible into common
stock at $0.174 per share. On August 30, 2006, the Company closed the first
tranche in the amount of $2.3 million, issuing the First Tranche Debenture.
Under the terms of this First Tranche Debenture, the Company will make weekly
scheduled principal payments of at least $125,000 commencing January 2, 2007,
with interest on the outstanding principal balance payable at the same time.
If
the shares of our common stock are saleable by Cornell Capital in the open
market, the Company has the right to make any and all such principal payments
by
issuing shares of its common stock to Cornell Capital with the amount of such
shares based upon the lower of $0.174 per share or 93% of the average of the
two
lowest daily volume weighted average per share prices of its common stock during
the five days immediately following the scheduled payment date. Cornell Capital
may convert all or any part of the unpaid principal and accrued interest owed
under the First Tranche Debenture into shares of our common stock at a
conversion price of $0.174 per share.
Under
an
amendment to the Tranche Debenture Agreement signed on October 23, 2006, the
additional tranches were rescheduled such that $1,175,000 of gross proceeds
will
be available no later than November 15, 2006, $1,175,000 of gross proceeds
will
be available on February 1, 2007, and $2,350,000 will be available upon the
Company successfully registering the conversion shares of common stock for
resale.
The
Company filed a registration statement on Form S-3 on October 12, 2006 including
the shares of our common stock that would be issued pursuant to our making
the
scheduled maturity payments of the Amended and First Tranche Debentures with
shares of common stock. However, we have not yet received clearance from the
SEC
that would allow the registration to be declared effective.
There
can
be no assurance that the registration statement on Form S-3 will become
effective, or become effective in time to allow the Company to make its
scheduled debenture maturity payments with shares of its common stock.
Currently, maturity payments on the Amended Debenture are scheduled to begin
at
the rate of $250,000 by mid-November 2006. In the event that the Form S-3 is
not
declared effective, alternative sources of cash are not identified, or Cornell
Capital does not agree to another delay in the commencement of the payment
maturity schedule of the Amended Debenture, the Company may be unable to make
this payment with cash thereby placing the Company in default of the terms
of
the Amended Debenture.
The
issuance of each debenture to Cornell Capital has been accompanied by the
issuance of a stock warrant. For example, in connection with the First Tranche
Debenture, we issued to Cornell Capital a warrant to purchase 3,333,334 shares
of our common stock at $0.174 per share. The Tranche Debenture Agreement
requires that we issue additional warrants to Cornell Capital in connection
with
the future scheduled fundings. In addition, the warrants that were issued to
Cornell Capital in connection with the Debenture and the Amended Debenture
were
amended, thereby increasing the number of shares and decreasing the per share
exercise prices. The number of shares subject to exercise under the warrants
related to the Debenture and the Amended Debenture were increased to 15,000,000
shares and 13,750,000, respectively, from 6,000,000 and 10,000,000,
respectively. The per share exercise prices of the warrants were reduced from
$0.50 and $0.275, respectively, to $0.20 in both instances.
During
the current year, we have been successful in obtaining lease financing covering
certain municipal wireless network equipment. On June 28, 2006, we signed
agreements with an equipment leasing firm in order to execute a sale/leaseback
transaction covering the municipal wireless network equipment in Tempe, Arizona.
The sale of the equipment provided $2,000,000 in proceeds; the leaseback period
is thirty-six months and includes a fair-market-value purchase option at the
end
of the lease term. However, in order to satisfy concerns about our credit
worthiness, we were required to purchase certificates of deposit totaling
$700,000 that serve as collateral for the benefit of the lessor. Commencing
eighteen months from the lease inception and assuming that we are not in
default, we shall be permitted to withdraw amounts from the certificate of
deposit on a monthly basis not exceeding the amount of the monthly payment.
We
expect that we will structure a similar transaction covering the wireless
network equipment that is being deployed in Farmers’ Branch, Texas. The cost of
this equipment approximates $1,300,000. With default-free meeting of our
obligations under these leases, we expect to negotiate future municipal wireless
equipment lease financing with reduced collateral requirements.
On
October 10, 2006, the Company signed a master equipment lease agreement with
a
lease financing firm that may provide up to $3 million in lease financing
capital for future wireless network equipment purchases. The commitment is
available only for equipment manufactured by Cisco Systems. Fifty percent of
the
commitment is designated for core network infrastructure equipment. The
remainder of the commitment is available for transmission equipment purchases
and can be used to finance up to fifty percent of the cost of such purchases.
The lease term for each equipment purchase shall be twenty-four
months.
Further,
we continue to negotiate the addition of new financing, including financing
provided by one of our vendors, and expect proceeds to be available during
fiscal year 2007, and we are have obtained extended payment terms from several
of our current wireless network equipment vendors.
During
the current quarter, we signed an agreement to assign the rights to certain
of
our wireless antenna patents to an unaffiliated party for $300,000 cash upon
the
satisfaction of certain conditions. Although we expect that the closing of
this
sale will occur in the third fiscal quarter, there can be no assurance that
the
sale conditions will be satisfied or that we will receive any portion of the
cash proceeds.
Should
we
fail to obtain alternative capital financing or eliminate the net losses and
negative cash flows of our operating businesses, we will be required to consider
other alternatives, including the reduction of our operations (in particular
the
deployment of additional municipal wireless networks), the discontinuance or
disposal of certain assets or operations, or the sale of the Company.
Inflation
Our
monetary assets, consisting primarily of cash and receivables, and our
non-monetary assets, consisting primarily of intangible assets and goodwill,
are
not affected significantly by inflation. We believe that replacement costs
of
equipment, furniture, and leasehold improvements will not materially affect
our
operations. However, the rate of inflation affects our expenses, such as those
for employee compensation and costs of network services, which may not be
readily recoverable in the price of services offered by us.
Risks
Related to Our Business
Investing
in our securities involves a high degree of risk. Before investing in our
securities, you should carefully consider the risks and uncertainties described
below and the other information contained in this report. If any of these risks
or uncertainties actually occurs, our business, financial condition or future
operating results could be materially harmed. In such an event, the trading
price of our common stock could decline and you could lose part or all of your
investment.
We
Have Lost Money Historically Which Means That We May Not Be Able to Achieve
and
Maintain Profitability
We
have
historically lost money. In the years ended March 31, 2006 and 2005, we
sustained net losses of $10,176,407 and $5,359,722, respectively. In addition,
we incurred a net loss of $8,848,421 in the six months ended September 30,
2006
caused primarily by declining revenues. As a result, the amount of cash used
in
operations during the six months ended September 30, 2006 was $3,876,369. Future
losses may occur. Accordingly, we will experience liquidity and cash flow
problems if we are not able to improve our operating performance or raise
additional capital as needed and on acceptable terms. If we fail to obtain
alternative capital financing or eliminate the net losses and negative cash
flows of our operating businesses, we will be required to consider other
alternatives, including the reduction of our operations (in particular the
deployment of additional municipal wireless networks), the discontinuance or
disposal of certain assets or operations, or the sale of the
Company.
We
May Be Unable to Make the Scheduled Maturity and Interest Payments under the
Amended Debenture
Under
the
terms of the Amended Debenture, we have agreed to make weekly scheduled
principal payments of at least $250,000 commencing in mid-November 2006 with
interest on the outstanding principal balance payable at the same time. The
amount of accrued interest was $295,937 at September 30, 2006. We have the
right
to make any and all such principal payments by issuing shares of our common
stock to Cornell Capital provided that
all
such shares may only be issued by the Company if such shares are tradable under
Rule 144 of the Securities Act of 1933 (the “Securities Act”), are registered
for sale under the Securities Act or are freely tradable by Cornell Capital
without restriction.
The
Company filed a registration statement on Form S-3 on October 12, 2006 covering
such shares, but it has not yet received clearance from the Securities Exchange
Commission that would allow the registration to be declared
effective.
There
can
be no assurance that the registration statement on Form S-3 will become
effective, or become effective in time to allow the Company to make its
scheduled debenture maturity payments with shares of its common stock. In the
event that the Form S-3 is not declared effective, alternative sources of cash
are not identified, or Cornell Capital does not agree to another delay in the
commencement of the payment maturity schedule of the Amended Debenture, the
Company may be unable to make these payments in cash putting the Company in
default of the terms of the Amended Debenture.
The
Conversion of the Debentures into Shares of Our Common Stock Could Result in
Significant Near-Term Dilution to Our Stockholders
On
June
30, 2006, we issued the Amended Debenture to Cornell Capital in the amount
of
$15,149,650, replacing the convertible debenture in the principal amount of
$15,500,000 dated May 13, 2005 that issued to Cornell Capital. Under the terms
of the Amended Debenture, as revised, we have agreed to make weekly scheduled
principal payments of at least $250,000 commencing November 15, 2006 with
interest on the outstanding principal balance payable at the same time. We
have
the right to make any and all such principal payments by issuing shares of
our
common stock to Cornell Capital with the amount of such shares based upon the
lower of $0.275 per share or 93% of the average of the two lowest daily volume
weighted average per share prices of our common stock during the five days
immediately following the scheduled payment date. Cornell Capital may convert
all or any part of the unpaid principal and accrued interest owed under the
Amended Debenture into shares of our common stock at a conversion price of
$0.275 per share.
On
August
28, 2006, we entered into a financing agreement with Cornell Capital to raise
up
to $7.0 million in three tranches. At the closing of each tranche, we will
issue
Cornell Capital a 7.75% secured convertible debenture in the principal amount
for that tranche, convertible into common stock at $0.174 per share, together
with a warrant to purchase up to 3,333,334 shares of common stock at an exercise
price of $0.174 per share. On August 30, 2006, we closed the first tranche
in
the amount of $2.3 million. Under the terms of this First Tranche Debenture,
we
have agreed to make weekly scheduled principal payments of at least $125,000
commencing January 2, 2007, with interest on the outstanding principal balance
payable at the same time. We have the right to make any and all such principal
payments by issuing shares of our common stock to Cornell Capital with the
amount of such shares based upon the lower of $0.174 per share or 93% of the
average of the two lowest daily volume weighted average per share prices of
our
common stock during the five days immediately following the scheduled payment
date. Cornell Capital may convert all or any part of the unpaid principal and
accrued interest owed under the First Tranche Debenture into shares of our
common stock at a conversion price of $0.174 per share.
On
November 1, 2006, the price of our common stock closed at $0.122 per share.
Should the price of our stock remain at the current level and we choose to
make
scheduled principal payments with our common stock, the issuance of shares
of
our common stock to Cornell Capital may result in significant dilution to the
value of common stock currently held by our stockholders. For example, using
93%
of the closing price per share on November 1 ($0.1135 per share) as the
calculation price, each weekly retirement of debt under the Amended Debenture
in
the amount of $250,000 would result in the issuance of
approximately 2,202,600 shares of our common stock to Cornell Capital
commencing November 15, 2006, each weekly conversion of debt under the first
of
the First Tranche Debenture in the amount of $125,000 would result in the
issuance of approximately 1,101,300 shares of our common stock to Cornell
Capital commencing January 2, 2007. Based on our current stock trading price,
we
would ultimately issue an aggregate of approximately 153,741,000 shares of
our
common stock to repay the Amended Debenture and the $7.0 million in tranche
debentures in full. However, we may issue fewer shares if the market price
of
our common stock increases, and we may issue more shares if the market price
of
our common stock decreases.
As
a Microcap Company, Raising Money on Commercially Reasonable Terms is Difficult.
If We Are Unable to Raise Additional Capital, We May Be Unable to Make
Acquisitions or to Fund Our Future Operations
We
have
relied almost entirely on external financing to fund our operations and
acquisitions to date. We have been particularly reliant on funds provided by
Cornell Capital. Such financing has historically come from a combination of
borrowings and sale of common stock. We drew a total of $39,173,129 in funds
under the $100 million Standby Equity Distribution Agreement (the “SEDA”)
resulting in the issuance of approximately 183,996,589 shares of our common
stock to Cornell Capital. Our SEDA expired on May 19, 2006 and was not
renewed.
Over
the
next two years we anticipate that we may need to raise additional or alternative
capital to fund major acquisitions and to grow our emerging businesses. We
anticipate that these additional funds will be in the range of $25 million
to
$200 million, depending on the pace of growth and/or the size of future
acquisitions.
Federal
Regulators May Take Positions with Which We Disagree or Which We Believe are
Contrary to Existing Law and Regulation, Which May Impose Substantial Litigation
Costs on Our Business, Impede Our Access to Capital and/or Force Us to Seek
a
Merger Partner
As
a
publicly traded telecommunications company, we are subject to the regulatory
scrutiny of both the Federal Communications Commission (the “FCC”) and the SEC.
Both agencies are administrative government agencies with statutory authority
to
implement and enforce laws passed by the U.S. Congress. Both the FCC and SEC
have the ability to use discretion in certain cases both in interpreting what
the laws passed by Congress mean and when to enforce such laws. The FCC and/or
SEC may even take positions with which we disagree or which we believe are
unfounded in statute, regulation, or prior agency guidance and which are adverse
to Mobilepro. In order to contest such behavior, Mobilepro may be forced to
resort to litigation. In the context of the SEC, Mobilepro’s ability to have its
registration statements “go effective” may be impeded if in its comments to
Mobilepro’s registration statement the SEC were to take a position with which we
disagree based on prior law, regulation or prior SEC interpretative guidance.
Such behavior would materially impair Mobilepro’s access to the capital markets,
potentially force Mobilepro to incur substantial litigation related costs and
may force Mobilepro to seek a merger with another company.
Prior
to
January 2004, we were a development stage company. Although we were incorporated
a little over six years ago, we have undergone a number of changes in our
business strategy and organization.
We
have
had several major shifts in our business strategy. In June 2001, we focused
our
business on the integration and marketing of complete mobile information
solutions that satisfy the needs of mobile professionals. In April 2002, we
acquired NeoReach and shifted our focus toward solutions supporting the third
generation wireless market. We shifted our business strategy in December 2003
by
beginning to expand significantly the scope of our business activity to include
Internet access services, local and long distance telephone services and the
ownership and operation of payphones. In 2005, we began to invest in the
business of deploying wireless broadband networks and providing wireless network
access services in wireless access zones to be primarily located in
municipality-sponsored areas. We entered these businesses primarily through
the
acquisition of established companies. These operations have all been acquired
subsequent to January 1, 2004. Accordingly, the Company has a limited operating
history upon which an evaluation of its prospects can be made.
Our
strategy is unproven and the revenue and income potential from our strategy
is
unproven. We may encounter risks and difficulties frequently encountered by
companies that have grown rapidly through acquisition, including the risks
described elsewhere in this section. Our business strategy may not be successful
and we may not be able to successfully address these risks. If we are
unsuccessful in the execution of our current strategic plan, we could be forced
to reduce or cease our operations.
We
Have Limited Experience Running Our Businesses Which May Hamper Our Ability
to
Make Effective Management Decisions
Virtually
all of our operations have been acquired or started in the last twenty-four
months. Therefore, our experience in operating the current business is limited.
Further, we intend to pursue additional acquisitions to further the development
of our Internet services business, competitive local exchange and wireless
broadband businesses.
Mr.
Jay
O. Wright became our Chief Executive Officer in December 2003. In February
2006,
Mr. Jerry M. Sullivan, Jr. became our President and Chief Operating Officer.
Prior to Mr. Sullivan joining the Company in June 2005 as President of our
subsidiary Kite Broadband, Messrs. Wright and Sullivan had no experience working
together. Since Mr. Wright joined our Company we have completed numerous
acquisitions and integrated various different management teams into our
operations. Prior to closing these acquisitions, Messrs. Wright and Sullivan
had
not previously worked with management at any of our subsidiaries and divisions.
The other senior executives, including the general managers of each of the
operating business segments, have joined the Company in connection with
acquisitions or been recently hired. None of these executives has significant
experience working with the others. Consequently, internal communication and
business-decision making processes are evolving. We may react too slowly or
incorrectly to trends that may emerge and affect our business. Our future
success depends on the ability of the senior executives to establish an
effective organizational structure and to make effective management decisions
despite their limited experience.
The
Success of Our Business Is Based on Unproven Revenue Generation Models Which
Means That We May Not Achieve Anticipated Revenues
Our
revenue models, especially for our municipal wireless network business, are
new
and evolving. Our ability to generate revenue depends, among other things,
on
our ability to provide quality wireless technology, telecommunications,
broadband and integrated data communication services to our customers utilizing
new technologies, new products and innovative bundled service packages. Because
our businesses are either newly acquired, based on emerging opportunities and
technologies, or based on new bundled services with new price packages, we
have
limited experience with our revenue models.
Our
ability to achieve organic revenue growth is dependent upon the success of
long-term projects, such as our wireless initiatives, that require us to incur
significant up-front costs. We expect to confront multiple challenges in
reaching the point where significant revenues are provided by this business.
For
example, the securing of a city contract is a multi-step process that can take
over six months to complete, including a pilot demonstration, the RFP
preparation, response and evaluation, contract negotiation, development of
the
deployment plan, and equipment installation and testing. Although we attempt
to
minimize development risks by carefully analyzing demographics, topography,
climate and other factors, each project includes the utilization of newly
developed transmission equipment. For example, operating expenses that have
been
incurred by our municipal wireless network business in the current year
approximated $1,096,000 and we expect that the cost of the equipment required
for the completion of the Tempe network will exceed $2.8 million. The revenues
of Kite Networks for the six months ended September 30, 2006 were $127,041.
In
order to generate greater revenues from these projects, we will be required
to
successfully complete marketing efforts to obtain individual subscribers willing
to pay us for wireless Internet service and negotiate contracts with large
Internet service providers allowing them use of the network.
In
addition, during the current fiscal year, the activities of the Internet
services operation have focused on the integration of the acquired companies.
The efforts are focused on combining service offerings, consolidating network
operations and customer support locations, and reducing operating expenses.
The
success of our overall growth strategy depends, in part, on our ability to
transition customers to new Internet access services, especially broadband
wireless, and/or to sell additional voice services to the existing customer
base. However, at present, dial-up subscribers represent a significant number
of
our Internet service customers. The erosion of this customer base is likely
to
continue until our new efforts to transition these customers to enhanced
services become more effective.
There
can
be no assurance that the projects will be successfully completed or that the
completed projects will provide the anticipated revenues. Accordingly, there
can
be no assurance that our business revenue models will be successful or that
we
can sustain revenue growth or maintain profitability.
Our
business model is partially dependent upon growth through acquisition of other
telecommunication service providers. We have completed twenty-one acquisitions
during the thirty-three month period ended September 30, 2006. We expect to
continue making acquisitions that will enable us to build our Internet services,
competitive local exchange carrier, and wireless broadband businesses.
Acquisitions involve numerous risks, including the following:
•
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Difficulties
in integrating the operations, technologies, products and personnel
of the
acquired companies;
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Diversion
of management’s attention from normal daily operations of the
business;
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Difficulties
in entering markets in which we have no or limited direct prior experience
and where competitors in such markets have stronger market
positions;
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Initial
dependence on unfamiliar partners;
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•
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Insufficient
revenues to offset increased expenses associated with acquisitions;
and
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The
potential loss of key employees of the acquired
companies.
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Acquisitions
may also cause us to:
•
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Issue
common stock that would dilute our current stockholders’ percentage
ownership;
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•
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Assume
liabilities;
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•
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Record
goodwill and non-amortizable intangible assets that will be subject
to
impairment testing on a regular basis and potential periodic impairment
charges;
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•
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Incur
amortization expenses related to certain intangible
assets;
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•
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Incur
large and immediate write-offs, and restructuring and other related
expenses; or
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Become
subject to litigation.
|
Mergers
and acquisitions are inherently risky, and no assurance can be given that our
previous or future acquisitions will be successful and will not materially
adversely affect our business, operating results or financial condition. In
order to achieve the critical mass of business activity necessary to
successfully execute our business plan, we plan to continue making strategic
acquisitions and significantly increase the number of strategic partners and
customers that use our technology and services. This growth has placed, and
will
continue to place, significant strain on our personnel, systems, and resources.
We expect that we will continue to hire employees, including technical,
management-level employees, and sales staff, in the foreseeable future. This
growth will require us to improve management, technical, information and
accounting systems, controls, and procedures. We may not be able to maintain
the
quality of our operations, control our costs, continue complying with all
applicable regulations and expand our internal management, technical information
and accounting systems in order to support our desired growth. We cannot be
sure
that we will manage our growth effectively, and our failure to do so could
cause
us to reduce or cease operations.
Many
of
the companies that we have acquired have been very small and/or privately held.
Consequently, we have made acquisition decisions based on historical information
that has not been audited. Generally, we structure our merger agreements to
give
us the right to make subsequent adjustments to the purchase consideration based
on the subsequent discovery of inaccuracies. However, the process requires
that
senior management spend significant amounts of time resolving disputes with
former owners of the acquired companies. In addition, we have been confronted
with the challenges of managing many remotely located operations and combining
different systems. Although we have been successful in retaining key managers
and other employees of our major acquired companies, the lack of employee
retention at certain smaller acquired companies has adversely affected the
integration of operations and the retention of customers.
Impairment
of Goodwill Could Result in Significant Future Charges That Could Jeopardize
Our
Ability to Raise Capital
At
September 30, 2006, our balance sheet included intangible assets with a total
carrying value of approximately $55,339,000, representing 59.5% of total assets,
and including approximately $47,220,042 in goodwill. Substantially all of this
goodwill has been recorded in connection with the series of acquisitions
completed by us since January 1, 2004. GAAP requires that we assess the fair
values of acquired entities at least annually in order to identify any
impairment in the values. We perform our annual impairment tests for goodwill
at
fiscal year-end. However, on a quarterly basis, we are alert for events or
circumstances that would more likely than not reduce the fair value of a
reporting segment below its carrying amount. If we determine that the fair
value
of an acquired entity is less than the net assets of the entity, including
goodwill, an impairment loss would be identified and recorded at that
time.
During
the three months ended December 31, 2005, both the Internet and voice services
segments incurred operating losses that were not expected. As a result,
management reviewed the carrying values of the assets of these segments and
determined that an adjustment for goodwill impairment was appropriate at
December 31, 2005. The Company recorded an impairment charge in the amount
of
$3,764,429, including $1,945,519 related to the Internet service companies
and
$1,818,910 related to Affinity Telecom (“Affinity”), a CLEC business located in
the state of Michigan that was acquired in August 2004. The impairment charges
represented approximately 17.2% and 84.5% of the goodwill related to the
Internet service companies (excluding InReach) and Affinity, respectively.
The
Company experienced a significant and steady loss of Affinity customers, and
Affinity incurred bad debt losses at a greater rate than in our other CLEC
companies. The negative customer churn of dial-up Internet access customers
has
exceeded management's expectations, contributing to the net losses incurred
by
this segment during the most recent four quarters. In the quarters ended March
31, 2006, June 30, 2006 and September 30, 2006, we recorded additional ISP
goodwill impairment charges of $682,116, $348,118 and $529,736, respectively,
as
customer churn continued to exceed expectations.
Future
assessments of the acquisition fair values could identify material impairment
losses resulting in substantial write-offs of goodwill. For example, the
goodwill included in the balance sheet at September 30, 2006 related to the
DFW
group of Internet service provider companies was approximately $11,786,000.
Future adjustments, that could include all of the remaining balance of the
DFW
goodwill, could have material adverse effects on our results of operations
and
our financial position, and could impede our continuing ability to raise capital
and/or to make acquisitions.
If
We Are Not Able to Compete Effectively in Our Markets That Are Highly
Competitive, We May Be Forced to Reduce or Cease
Operations
We
believe that our ability to compete successfully in our markets depends on
a
number of factors, including market presence; the adequacy of our member and
technical support services; the capacity, reliability and security of our
network infrastructures; the ease of access to and navigation of the Internet
provided by our services; our pricing policies and those of our competitors
and
suppliers; the timing of introductions of new services by us and our
competitors; our ability to support existing and emerging industry standards;
and general industry and economic trends. Other specific factors that could
impact our ability to compete successfully include the following items, among
others:
•
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our
success in withstanding the continued shift from dial-up ISP service
to
broadband ISP service;
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•
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the
performance of our products, services and technology in a manner
that
meets customer expectations;
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the
success of our efforts to develop effective channels of distribution
for
our products;
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our
ability to price our products that are of a quality and at a price
point
that is competitive with similar or comparable products offered by
our
competitors;
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the
success of our efforts to develop, improve and satisfactorily address
any
issues relating to our technology;
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our
ability to effectively compete with companies that have substantially
greater market presence and financial, technical, marketing and other
resources than us including (i) local ISPs, (ii) national and regional
ISPs, (iii) established online services; (iv) nonprofit or educational
ISPs; (v) national telecommunications companies; (vi) Regional Bell
Operating Companies (“RBOCs”); (vii) competitive local exchange carriers;
and (viii) cable operators;
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our
ability to adapt to the consolidation of existing ISPs with or into
larger
entities, or entry of new entities into the Internet services market,
would likely result in greater competition for the
Company;
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our
ability to collect dial around compensation owed to our pay telephone
business from third party payors; and
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the
continued erosion of coin revenues in our pay telephone business
resulting
from the penetration of wireless technologies and prepaid calling
cards.
|
There
can
be no assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to compete successfully. Failure
to do so could harm our business and operating results in a material way and
could cause us to reduce or cease operations.
Recent
Industry Trends Could Adversely Affect Our Ability to Compete in the Wireless
Communications Industry and Significantly Reduce the Likelihood of Our
Success
The
wireless communications industry has experienced consolidation of participants
and this trend may continue. If wireless carriers consolidate with companies
that utilize technologies that are similar to or compete with our wireless
technology, our proportionate share of the emerging market for wireless
technologies may be reduced or eliminated. This reduction or elimination of
our
market share could reduce our ability to obtain profitable operations and could
even cause us to reduce or cease operations.
In
addition, the increasing number of municipally sponsored wireless network
opportunities is attracting the interest of very large competitors. For example,
competitors for the Philadelphia network included Verizon, Comcast, and
Earthlink. According to a published report, the city of San Francisco received
plans from 26 companies in response to a request for proposals, including
Cingular Wireless, Earthlink, and Google. The
activity of these competitors, with resources far greater than ours, could
adversely affect our ability to obtain additional awards for the deployment
and
management of wireless networks and significantly reduce the likelihood of
success for our emerging wireless network and other businesses.
Our
Payphone Division is Experiencing Intense Competition That Has Resulted in
Revenue Declines That May Continue
Through
our Davel subsidiary, we compete with other independent pay telephone providers
and large local exchange carriers for the locations where we install and operate
pay telephones. Many of these competitors have substantially greater financial,
marketing and other resources than us.
Additionally,
Davel indirectly competes with other telecommunications providers, including
providers of wireless services and prepaid calling card companies, for end
users
to utilize our pay telephones to make local and long distance calls. The
proliferation of wireless communication devices has continued to reduce the
use
of pay telephones. For example, the cellular telephone business of CloseCall
represents indirect competition for Davel. Furthermore, certain providers of
wireless communication devices have continued to introduce rate plans, including
pre-paid rate plans, that are competitively priced with certain of the products
offered by us and have negatively impacted the usage of pay telephones
throughout the nation. The effect on our business is that revenues of Davel
are
steadily declining. Davel’s revenues were $40,305,697 for the twelve months
ended March 31, 2006 compared with $55,091,465 (including the pre-acquisition
portion) for the corresponding period of the prior year, a decline of 26.8%.
Further, Davel’s revenues were $16,762,255 for the six months ended September
30, 2006 compared with $22,187,052 for the six months ended September 30, 2005,
a decline of 24.5%.
If
we are
unsuccessful in increasing revenues from other sources, the declining payphone
business may contribute to declines in consolidated revenues and the incurring
of additional consolidated operating losses. In such event, we may be forced
to
dispose of this business pursuant to terms not considered favorable to
us.
Davel’s
Reliance on Third Party Providers Could Delay the Timely Receipt of Accounts
Receivable
Davel
relies on third party providers to provide local access, long distance and
operator services to its pay telephones. The uncertainty with the greatest
potential negative financial impact relates to revenue from and collectibility
of access code calls and toll-free dialed calls, or dial around compensation
(i.e., intercarrier compensation paid to us by the providers of 800 numbers
at
the rate of 49.4 cents per call). In current quarters, Davel initially
recognizes revenue related to non-coin dial-around calls that are initiated
from
a Company payphone in order to gain access to a long distance company or to
make
a standard toll free call based on estimates. The inter-exchange carriers have
historically paid for fewer dial-around calls than are actually made and the
collection period for dial-around revenue is generally four to six months,
but
can be in excess of a year. The estimates of revenue are based on the historical
analysis of calls placed and amounts collected. These analyses are updated
on a
quarterly basis. Recorded amounts of revenue relating to prior periods may
be
adjusted based on the amounts of actual receipts and/or an unexpected change
in
the historical trends of calls and/or collections.
Dial
around compensation represents a material percentage of our consolidated
revenues. Dial around revenue was approximately $9,655,000 in the year ended
March 31, 2006, representing approximately 9.8% of consolidated revenues. Dial
around revenue was approximately $1,749,000 in the three months ended September
30, 2006, representing approximately 7.5% of consolidated revenues for the
quarter. The amount of dial-around revenue estimated to be collectible and
included in the balance of accounts receivable at September 30, 2006 was
approximately $3,771,000. We depend on the third-party service providers to
quickly and accurately report and pay amounts owed to us as dial around
compensation. Our inability to obtain such reports and/or our inability to
collect amounts owed to us could result in material reductions in accounts
receivable with material adverse effects to future consolidated revenues and
net
income.
Our
future success depends in a large part upon the continued service of key members
of our senior management team. In particular, our chief executive officer,
Mr.
Jay O. Wright, is important to the overall management of our Company as well
as
the development and implementation of our business strategy. Although we have
designed employment agreements with Mr. Wright and other key executives that
we
believe provide incentives to perform at high levels and to fulfill the terms
of
their agreements with us, each executive, or any other employee, may terminate
their employment with us at any time. For instance, in September 2006, our
general counsel, Geoffrey B. Amend, resigned. Our future success also depends
on
our ability to identify, attract, hire, retain and motivate other well-qualified
managerial, technical, sales and marketing personnel. There can be no assurance
that these professionals will be available in the market or retained, or that
we
will be able to meet or to continue to meet their compensation requirements.
Failure to establish and maintain an effective management team and work force
could adversely affect our ability to operate, to grow and to manage our
businesses.
We
regard
certain aspects of our products, processes, services, and technology as
proprietary. We have taken steps to protect them with patents, copyrights,
trademarks, restrictions on disclosure, and other methods. Despite these
precautions, we cannot be certain that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. Any
infringement, misappropriation or independent development could seriously harm
our business.
We
have
filed patent applications with respect to our ZigBee wireless technology and
for
certain aspects of our chips, but these may not be issued to us, and if issued,
may not protect our intellectual property from competition which could seek
to
design around or invalidate these patents. Our failure to adequately protect
our
proprietary rights in our products, services and technology could harm our
business by making it easier for our competitors to duplicate our
services.
We
own
several Internet domain names including, among others, www.mobileprocorp.com,
www.nationwide.net www.closecall.com, www.wazmetro.com, www.tommywireless.com,
www.neoreach.com and www.neoreachwireless.com. The regulation of domain names
in
the United States and in foreign countries may change. Regulatory bodies could
establish additional top-level domains or modify the requirements for holding
domain names, any or all of which may dilute the strength of our names. We
may
not acquire or maintain our domain names or additional common names in all
of
the countries in which our marketplace may be accessed, or for any or all of
the
top-level domains that may be introduced. The relationship between regulations
governing domain names and laws protecting proprietary rights is unclear.
Therefore, we may not be able to prevent third parties from acquiring domain
names that infringe or otherwise decrease the value of our trademarks and other
proprietary rights.
We
may
have to resort to litigation to enforce our intellectual property rights,
protect our trade secrets, determine the validity and scope of the proprietary
rights of others, or defend ourselves from claims of infringement, invalidity
or
unenforceability. Litigation may be expensive and divert resources even if
we
win. This could adversely affect our business, financial condition and operating
results such that it could cause us to reduce or cease operations.
If
We Are Unable to Successfully Acquire the Necessary Equipment, the Deployment
and Management of Our Wireless Networks Could Be Delayed
The
successful deployment and management of a broadband wireless network, like
the
Tempe network, depends on our ability to obtain the necessary technical
equipment and to acquire such equipment when needed at prices and on terms
acceptable to us. Required equipment includes antennas, transmitters and network
routers. For the Tempe network, we successfully obtained such equipment with
the
total cost approximating $2.8 million. To date, we have incurred an additional
$2.8 million in equipment costs related to the wireless network deployments
in
Farmers’ Branch, Texas, and Chandler, Arizona. The transmission equipment being
installed by us incorporates certain new technologies that are largely untested
in these types of networks. Should functionality prove to be ineffective, we
may
be required to make additional expenditures to upgrade or replace equipment
that
has already been installed. There can be no assurance that our purchasing
efforts will continue to be successful. If we are unable to acquire the
remainder of the equipment necessary for the successful completion of the
wireless networks that we have been awarded when needed, or are unable to
purchase equipment for future networks, all at prices and on terms acceptable
to
us, the deployment, ownership and management of broadband wireless networks
could be delayed.
If
We Fail to Negotiate Definitive Agreements, the Deployment of Municipal Wireless
Networks in Cities That Have Selected Us to Do So Will Not
Occur
Selection
of our Company for the deployment, ownership and operation of a city-wide
wireless networks may result after a formal bid and proposal process or it
may
result from a directed award. We have been selected by ten municipalities in
total, and we are working on eight of those projects. However, negotiation
of a
definitive contract covering the engagement typically follows the announcement
of the selection. There can be no assurance that we will complete a deployment
until a definitive contract is in place. For example, earlier last year, we
announced our selection by the city of Sacramento, California. However, more
recently, we announced our decision to terminate the pursuit of this project
during contract negotiation as we determined that certain new requirements
imposed by the city were inconsistent with our current business model and
original award. Likewise, during the current quarter, we discontinued
negotiations with the prime contractor for the Brookline, Massachusetts wireless
network deployment due to economic issues and legal risks. Of the remaining
active projects, we have not yet completed contract negotiation with the cities
of Akron and Cuyahoga Falls, Ohio. There can be no assurance that we will reach
a definitive agreement for the deployment, ownership and operation of wireless
networks in these cities.
Our
industry is characterized by rapid technological change, changes in customer
requirements and preferences, frequent introduction of products and services
embodying new technologies and the emergence of new industry standards and
practices that could render our existing services obsolete. Our future success
will depend on our ability to enhance and improve the responsiveness,
functionality, accessibility and features of our services including providing
broadband for existing dial-up ISP customers. We expect that our marketplace
will require extensive technological upgrades and enhancements to accommodate
many of the new products and services that we anticipate will be added to our
marketplace. We cannot assure you that we will be able to expand and upgrade
our
services, or successfully introduce new services or features that we develop
in
the future. Failure to keep pace with technology gains or to satisfy the desire
of customers to utilize such new technology could render our services obsolete
resulting in future reductions in revenues.
Disruptions
to the Growth and Maintenance of the Internet Infrastructure Could Harm Our
Internet Services Business
Our
future success will depend on the continued growth and maintenance of the
Internet infrastructure. This includes maintenance of a reliable network
backbone with the necessary speed, data capacity, and security for providing
reliable Internet services. Internet infrastructure may be unable to support
the
demands placed on it if the number of Internet users continues to increase
or if
existing or future Internet users access the Internet more often or increase
their bandwidth requirements. In addition, viruses, worms, and similar programs
may harm the performance of the Internet. The Internet has experienced a variety
of outages and other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the future. To date,
we
have not experienced significant disruptions to our business as the result
of
such problems. However, these outages and delays, if they were to occur, could
reduce the level of Internet usage as well as our ability to provide our
solutions. If the growth, maintenance or growth of the Internet infrastructure
is disrupted in any of these ways, our revenues, especially the revenues of
our
Internet services segment, could be adversely affected resulting in harm to
our
business.
The
Unavailability of Telecommunication Lines Could Threaten Our
Business
Our
ability to deliver good quality services at competitive prices depends on our
ability to obtain access to T-l, local access and dial-up lines pursuant to
pricing and other terms that are acceptable to us. Access to these lines
necessary for providing services to a significant portion of our subscribers
is
obtained from incumbent local exchange carriers like Verizon, SBC, and Bell
South. In 2005, we have been successful in reaching certain important agreements
with each of these carriers providing us with opportunities to expand services
and the geographic coverage of such services and predictable prices, avoiding
any interruption in service to our customers. In the event that any of the
carriers would be unable or unwilling to provide service to us, even if legally
required to do so, our ability to service existing customers or add new
customers could be adversely impaired in a material manner. For instance, Qwest
has delayed moving certain lines to AFN for an AFN customer which has cost
AFN
the opportunity to expand its revenue and profit more quickly.
The
Federal and State Regulations under Which Our Payphone Business Operates Could
Change, Resulting in Harm to This Business
Historically,
many parties legally obligated by the FCC to pay dial around compensation have
nevertheless failed to do so. We believe that such failures continue to exist
today. While we believe that we would have the right to sue in order to collect
amounts owed, such efforts may consume management time and attention and our
cash, and may entail costly and time consuming litigation, including appeals
to
the U.S. Supreme Court. Furthermore, there can be no assurance that such efforts
would result in the collection of any additional amounts. Consequently, such
illegal nonpayment activities may adversely affect our cash flows, receivable
collectibility, and future business profitability. In addition, the December
2004 decision by the Federal Communications Commission to abolish “UNE-P” rules
and has resulted in increased local line rates for us. The March 2004 United
States Court of Appeals, D.C. Circuit decision to vacate the Federal
Communications Commission Unbundled Network Element rules will have an unknown
effect on local access pricing for pay telephone providers; however, it is
likely that the impact will cause additional price increases to pay telephone
providers for the purchase of local access services.
Our
Payphone Business Revenue Is Impacted by Seasonal
Variations
Davel’s
revenue from pay telephone operations is affected by seasonal variations. Since
many of its pay telephones are installed outdoors, weather patterns have
differing effects on our revenue depending upon the region of the country where
the pay telephones are located. For example, the pay telephones installed and
operated throughout the Midwestern and eastern United States produce their
highest call volumes during the second and third calendar quarters, when the
climate tends to be more favorable. Currently, approximately 25% of our
payphones are located in these regions of the country. Unusually severe weather
in these regions could exacerbate the seasonal variations in revenues resulting
in adverse effects on our business. In addition, changes in the geographic
distribution of Davel’s pay telephones in the future may result in differing
seasonal variations in our operating results.
Our
Common Stock Is Deemed to Be “Penny Stock,” Which May Make It More Difficult for
Investors to Resell Their Shares Due to Suitability
Requirements
Our
common stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. A penny stock
has
the following characteristics:
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It
is traded at a price of less than $5.00 per share;
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It
is not traded on a “recognized” national exchange;
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Its
price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than $5.00
per
share); or
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Its
issuer has net tangible assets less than $2.0 million (if the issuer
has
been in continuous operation for at least three years) or $5.0 million
(if
in continuous operation for less than three years), or has average
annual
revenues of less than $6.0 million for the last three
years.
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Trading
of our stock may be restricted by the SEC’s penny stock regulations that may
limit a stockholder’s ability to buy and sell our stock.
The
penny
stock rules impose additional sales practice requirements on broker-dealers
who
sell to persons other than established customers and “accredited investors.” The
term “accredited investor” refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information,
must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. Moreover, broker/dealers are required to determine whether an
investment in a penny stock is a suitable investment for a prospective investor.
The penny stock rules require that prior to a transaction in a penny stock
not
otherwise exempt from these rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the transaction.
In
addition, the National Association of Securities Dealers, or NASD, has adopted
sales practice requirements that may also limit a stockholder’s ability to buy
and sell our stock. Before recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment
is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the NASD believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The NASD requirements make it more difficult for broker-dealers
to
recommend that their customers buy our common stock, which may limit investors’
ability to buy and sell our stock and have an adverse effect on the market
for
our shares.
If
Cornell Capital or Other Large Stockholders Sell Part or All of Their Shares
of
Common Stock in the Market, Such Sales May Cause Our Stock Price to
Decline
From
time
to time, Cornell Capital and other selling stockholders may sell in the public
market up to all of the shares of common stock owned at that time. Mr. Wright
has executed “lock-up” agreements that prohibit the sale or disposition by him
of more than one million (1,000,000) shares of the Company’s common stock during
any calendar quarter during his employment period. Additionally, as a result
of
Mr. Wright’s buying program under Rule 10b5-1, he is unlikely to sell any shares
within six months of any purchase because of the disgorgement provisions of
Section 16 under the Securities Act of 1933. Mr. Wright’s buying program is
scheduled to expire in January 2007.
This
offering attempts to register a large percentage of the shares held by our
executive officers and directors. While we are not aware of any plans of any
officer or director to leave Mobilepro, it is not uncommon for similarly
situated officers and directors to leave a company after they are able to sell
a
sufficient number of shares to meet their individual financial goals, which
time
frame may be accelerated if the shares appreciate in value. Our officers and
directors may be similarly disposed.
Any
significant downward pressure on our stock price caused by the sale of stock
by
large selling stockholders could encourage short sales by third parties. Such
short sales could place further downward pressure on our stock
price.
If
Our Current or Previous Capital Raising Transactions with Cornell Capital
Were
Held To Be In Violation of the Securities Act of 1933, We Could Experience
Significant Negative Consequences
During
its review of Amendment No. 1, filed on November 30, 2005, to our Registration
Statement on Form SB-2, originally filed on September 30, 2005 and withdrawn
by
us on September 22, 2006, and in its comment letter dated November 8, 2006
to
this registration statement, the SEC issued a comment stating that the repayment
of convertible promissory notes to Cornell Capital using proceeds from advances
under the SEDA may constitute a violation of Section 5 of the Securities
Act of
1933 (the “Securities Act”) by allowing Cornell Capital to effectively control
when the exercise of “puts” of our shares under the SEDA occurred. Mobilepro
entered into a convertible debenture in 2002 with Cornell Capital as a bridge
financing in connection with a $10 million equity credit line and filed
registration statements to register the shares underlying the convertible
debenture and SEDA in early 2003. We do not now have a SEDA in place with
Cornell Capital since the most recent one expired in May 2006 and has not
been
renewed. Other than the convertible debenture issued to Cornell Capital in
2002,
we have not entered into any pre-funding of any SEDAs by issuance of convertible
debentures to Cornell Capital.
We
requested guidance from the SEC regarding these transactions and how the
transactions we had completed implicated Section 5. The guidance we received
was
a reference to Section VIII of the Commission’s Current Issues and Rulemaking
Projects Quarterly Update dated March 31, 2001 (the “Quarterly Update”). We
analyzed each requirement for an equity line to comply with the Securities
Act
set forth in the Quarterly Update. We believe that we fully complied with
the
SEC’s guidance and that the guidance does not explicitly or implicitly prohibit
or in any way limit the use of proceeds under the SEDA to repay non-convertible
debt obligations to Cornell Capital or any other party or limit any other
use of
proceeds. We are not aware of any other law, regulation or interpretive guidance
on this subject and have not been advised of the existence of any by the
SEC.
Once we became aware of the position of the staff of the SEC on this issue,
however, we nevertheless
immediately changed
our repayment of notes issued to Cornell Capital to ensure that such repayments
of debt were made only from cash generated by our operations or provided
from
other sources. Furthermore, all such non-convertible notes payable to Cornell
Capital were repaid during the quarter ended June 30, 2006, and no such notes
were payable to Cornell Capital at June 30, 2006 or September 30,
2006.
Accordingly,
we do not believe that these transactions constitute a violation of the
Securities Act.
However,
if a Section 5 violation was found by a court or other legal body to have
occurred that was not precluded by the statute of limitations under Section
13
of the Securities Act, purchasers of shares registered under the SEDA could
have
a right of rescission under the Securities Act or a claim for other damages.
Such a finding could potentially have a material adverse effect on our Company
and our stock price. Also, the SEC could commence an enforcement action against
us, and if these transactions were held by a court to be in violation of
the
Securities Act, such an action could cause a material adverse effect and
the
market price of our common stock could decline, which could force us to sell
or
merge the Company because our ability to raise additional financing would
be
significantly compromised.
We
do not
believe we have violated the Securities Act, and we would contest vigorously
any
claim that a violation of the Securities Act occurred.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
Not
applicable.
Item
4. Controls and Procedures.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer (CEO) and Chief Accounting Officer (CAO), we conducted an
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, our CEO and our CAO have concluded that the design and operation
of
our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that information required to be disclosed in the reports that
we
file or submit under the Exchange Act is accumulated and communicated to
management, including our principal executive and financial officers, to allow
timely decisions regarding required disclosure.
There
have been no changes in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings.
In
addition to certain other litigation arising in the normal course of its
business that we believe will not materially affect our financial position
or
results of operation, we were involved with the following legal proceedings
during the six months ended September 30, 2006.
1) |
At
the time that we acquired Davel, there was existing litigation brought
against Davel and other defendants regarding a claim associated with
certain alleged patent infringement. Davel has been named as a defendant
in a civil action captioned Gammino v. Cellco Partnership d/b/a Verizon
Wireless, et al., C.A. No. 04-4303 filed in the United States District
Court for the Eastern District of Pennsylvania. The plaintiff claims
that
Davel and other defendants allegedly infringed its patent involving
the
prevention of fraudulent long-distance telephone calls. Davel does
not
believe that the allegations set forth in the complaint are valid,
continues to assess the validity of the Gammino Patents and continues
to
determine whether the technology purchased by Davel from third parties
infringes upon the Gammino Patents. The plaintiff is seeking monetary
relief of at least $7,500,000. The case is in the discovery phase
of the
litigation.
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According
to the terms of the Davel acquisition, the former secured lenders of Davel,
subject to certain limitations addressed below, have agreed to reimburse the
Company for the litigation cost and any losses resulting from the Gammino
lawsuit. The former secured lenders have agreed to fund such costs from future
Regulatory Receipts that were assigned to them by Davel. The Regulatory Receipts
are being deposited into a third-party escrow account and used to reimburse
the
Company for costs incurred in connection with the litigation. The secured
lenders are not required to fund the escrow account or otherwise reimburse
the
Company for amounts, if any, in excess of actual Regulatory Receipts collected.
Any amount remaining in the escrow account at the conclusion of the litigation
is to be distributed to the former secured lenders. Subsequent to March 31,
2005, the Company has received significant Regulatory Receipts, which are being
held in escrow. These funds can be used to reimburse the Company for costs,
including legal fees, incurred in defending or settling the litigation matter.
We believe that there are sufficient funds in the escrow account to pay both
our
legal costs in defending against this plaintiff's infringement claims and any
potential judgment that could be reasonably expected in our view. There is
a
potential exposure of the Company to the $7,500,000 claim in the event that
the
Regulatory Receipts that are being held in escrow are insufficient to cover
any
potential judgment against the Company should it be found liable for the full
monetary amount the plaintiff is seeking.
2) |
On
September 10, 2004, CloseCall was served a complaint in an action
captioned Verizon Maryland Inc., Verizon New Jersey Inc., and Verizon
Delaware Inc. in the Circuit Court for Montgomery County, Maryland.
Verizon sued for “in excess of $1,000,000” based on alleged unpaid
invoices for services provided to CloseCall. Verizon asserted that
CloseCall underpaid the Federal Subscriber Line Charges billed by
Verizon,
by applying an uncollectible factor to the amounts charged by Verizon.
In
addition, Verizon contended that CloseCall underpaid the amounts
owed to
Verizon by misapplying the terms of the “merger discount” offered to
CLECs, including CloseCall, as a result of the merger between Bell
Atlantic and GTE.
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CloseCall
filed counterclaims against Verizon. The first claim stemmed from Verizon’s
refusal to resell certain bundled telecommunications services to CloseCall,
despite repeated requests by CloseCall and the requirements of the
Communications Act of 1934, as amended. In addition, CloseCall asserted damages
as a result of Verizon’s entry into secret resale agreements with two CLECs,
offering those companies deep discounts on telecommunications services not
offered to other CLECs, including CloseCall. CloseCall also asserted damages
as
a result of Verizon’s failure to provide dialing parity to CloseCall’s
customers. CloseCall also asserted a claim for tortious interference with
business relations as a result of Verizon’s policy of blocking local service
change orders for any customer that also receives DSL service from or through
Verizon. CloseCall made a declaratory judgment claim for inaccurate and improper
billings by Verizon, including carrier access billing service charges.
On
November 2, 2005, the Circuit Court for Montgomery County (a) dismissed
CloseCall's counterclaim relating to Verizon's alleged breach of the parties'
resale agreements by refusing to offer for resale bundled telecommunications
services that Verizon offered to its own end-user customers and by refusing
to
offer to CloseCall the same discounts for resold services offered by Verizon
to
other competitive local exchange carriers, (b) severed CloseCall's
counterclaims, other than the claim related to CABS charges, and (c) ordered
CloseCall to pursue the severed counterclaims in the first instance before
the
appropriate federal or state administrative agency.
As
a
result of the Circuit Court for Montgomery County's November 2, 2005 Order,
CloseCall filed a Complaint against Verizon before the Public Service Commission
of Maryland in connection with CloseCall’s allegations that (a) Verizon's
failure to provide dialing parity to CloseCall's end-user customers and (b)
Verizon's refusal to process local service change orders for customers also
subscribing to Verizon's DSL service.
On
June
9, 2006, Verizon Maryland Inc., Verizon New Jersey Inc., and Verizon Delaware
Inc. and CloseCall entered into a Confidential Settlement and Release Agreement,
which ends the pending litigation between the parties relating to the payment
of
Subscriber Line Charges by CloseCall and the application of the terms of the
promotional resale discount offered by Verizon to CloseCall in connection with
the 2000 merger between Bell Atlantic Corporation and GTE Corporation. The
terms
of the parties' settlement are confidential.
3) On
August
6, 2006, we were served with a summons and complaint filed in the Superior
Court
of the State of Arizona in Maricopa County in the matter captioned Michael
V.
Nasco, et. al. vs. MobilePro Corp., et. al. which alleges claims arising out
of
the acquisition by the Company of Transcordia, LLC. The plaintiff alleges claims
of breach of contract, fraud, relief rescission, failure to pay wages and unjust
enrichment and seeks damages in excess of $3 million. On or about November
7,
2006, we filed a motion to dismiss arguing lack of standing and corporate
existence. Although we believe that our motion to dismiss will be granted there
can be no guarantee that the ruling of the court will be favorable to us. In
the
event the motion to dismiss is not granted, we believe that any potential
exposure related to the claims alleged against the Company is not likely to
be
material.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
April
1, 2006, we granted a warrant to purchase 250,000 shares of our common stock
to
Mr. Byron Wagner in connection with his joining our Board of Advisors,
exercisable at $0.20 per share.
On
June
22, 2006, we issued 200,000 shares of our common stock to Ryan Beck & Co. in
connection with their providing investment banking services to us.
In
August
2006, we issued 300,996 shares of our common stock to Alex Kang, a former
employee, in connection with his exercise of employee stock
options.
On
August
14, 2006, we issued a warrant to purchase 2,000,000 shares of our common stock
to Ray Cagle in connection with his appointment as Executive Vice President
of
the Company, and Chief Operating Officer of Kite Networks, exercisable at $0.135
per share
On
August
28, 2006, in connection with the First Tranche Debenture, we issued a warrant
to
purchase 3,333,334 shares of our common stock to Cornell Capital, exercisable
at
a per share price of $0.174.
On
August
28, 2006, we also agreed to reset the warrants to purchase shares of our common
stock that had previously been issued to Cornell Capital. The number of shares
subject to exercise under the warrants related to the Debenture and the Amended
Debenture were increased to 15,000,000 shares and 13,750,000, respectively,
from
6,000,000 and 10,000,000, respectively. The per share exercise prices of the
warrants were reduced from $0.50 and $0.275, respectively, to $0.20 in both
instances.
Except
as
otherwise noted, the securities described in this Item were issued pursuant
to
the exemption from registration provided by Section 4(2) of the Securities
Act
of 1933 and/or Regulation D promulgated under the Securities Act. Each such
issuance was made pursuant to individual contracts that are discrete from one
another and are made only with persons who were sophisticated in such
transactions and who had knowledge of and access to sufficient information
about
Mobilepro to make an informed investment decision. Among this information was
the fact that the securities were restricted securities.
Item
3. Defaults upon Senior Securities.
There
were no defaults upon senior securities during the three months ended September
30, 2006.
Item
4. Submission of Matters to a Vote of Security Holders.
The
registrant reported the results of its Annual Meeting of Stockholders that
was
held on August 18, 2006 by filing a Current Report on Form 8-K on August 24,
2006 which is incorporated herein by reference.
Item
5. Other Information.
Not
applicable.
Item
6. Exhibits.
(a) |
The
following exhibits are filed as part of this
report:
|
Exhibit
No.
|
Description
|
|
Location
|
|
2.1
|
Agreement
and Plan of Merger, dated as of March 21, 2002, by and among Mobilepro
Corp., NeoReach Acquisition Corp. and NeoReach, Inc.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on April 5, 2002
|
|
2.2
|
Agreement
and Plan of Merger, dated as of January 20, 2004, by and among Mobilepro
Corp., DFWI Acquisition Corp., DFW Internet Services, Inc., Jack
W. Beech,
Jr. and Jack W. Beech, Sr.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on February 4, 2004
|
|
2.3
|
Agreement
and Plan of Merger, dated as of March 1, 2004, by and among DFW Internet
Services, Inc., DFW Internet Acquisition Corp., Internet Express,
Inc., J.
Glenn Hughes and Loretta Hughes
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on April 29, 2004
|
|
2.4
|
Agreement
and Plan of Merger, dated as of April 21, 2004, by and among DFW
Internet
Services, Inc., DFWA Acquisition Corp., August.Net Services, LLC,
Louis G.
Fausak, Andrew K. Fullford, John M. Scott, Dennis W. Simpson, Andrew
T.
Fausak, and Gayane Manasjan
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on April 29, 2004
|
|
2.5
|
Agreement
and Plan of Merger, dated as of June 3, 2004, by and among Mobilepro
Corp., DFW Internet Services, Inc., DFWS Acquisition Corp., ShreveNet,
Inc. and the stockholders identified therein
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on June 8, 2004
|
|
2.6
|
Asset
Purchase Agreement, dated as of June 21, 2004, by and between Crescent
Communications, Inc. and DFW Internet Services, Inc.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on June 22, 2004
|
|
2.7
|
Agreement
and Plan of Merger, dated July 6, 2004, by and among the Company,
DFW
Internet Services, Inc., DFWC Acquisition Corp., Clover Computer
Corp. and
Paul Sadler
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 8, 2004
|
|
2.8
|
Agreement
and Plan of Merger, dated July 14, 2004, by and among DFW Internet
Services, Inc., DFWT Acquisition Corp., Ticon.net, Inc. and the
stockholders identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 15, 2004
|
|
2.9
|
Agreement
and Plan of Merger, dated July 30, 2004, by and among the Company,
Affinity Acquisition Corp., C.L.Y.K., Inc. and the stockholders identified
therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on August 20, 2004
|
|
2.10
|
Amendment
No. 1 to Agreement and Plan of Merger, dated December 28, 2004, by
and
among the Company, Affinity Acquisition Corp., C.L.Y.K., Inc. and
the
stockholders identified therein
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on January 21, 2005
|
|
2.11
|
Asset
Purchase Agreement, dated as of August 13, 2004, by and among Web
One,
Inc., DFW Internet Services, Inc. and Jeff McMurphy
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on August 19, 2004
|
|
2.12
|
Agreement
and Plan of Merger, dated August 31, 2004, by and among the Company,
MVCC
Acquisition Corp. and CloseCall America, Inc.
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on October 19, 2004
|
|
2.13
|
Amendment
No. 1 to Agreement and Plan of Merger, dated September 30, 2004,
by and
among the Company, MVCC Acquisition Corp. and CloseCall America,
Inc.
|
|
Incorporated
by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K
filed on October 19, 2004
|
|
2.14
|
Loan
Purchase Agreement and Transfer and Assignment of Shares, dated September
3, 2004, by and among the Company, Davel Acquisition Corp., Davel
Communications, Inc. and certain stockholders identified
therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 9, 2004
|
|
2.15
|
Agreement
and Plan of Merger, dated September 15, 2004, by and among the Company,
DFWW Acquisition Corp., World Trade Network, Inc. and Jack
Jui
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 15, 2004
|
|
2.16
|
Agreement
and Plan of Merger, dated September 16, 2004, by and among the Company,
DFW Internet Services, Inc., DFWR Acquisition Corp., The River Internet
Access Co. and the stockholders identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on September 17, 2004
|
|
2.17
|
Agreement
and Plan of Merger by and among Registrant, NeoReach, Inc., Transcordia
Acquisition Corp., Transcordia, LLC and its Unit Holders, dated April
2005
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed August
15, 2005
|
|
2.18
|
Agreement
and Plan of Merger by and among Registrant, NeoReach, Inc., NeoReach
Wireless, Inc., Evergreen Open Broadband Corporation, and Certain
Shareholders
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed August
15, 2005
|
|
2.19
|
Agreement
and Plan of Merger, dated June 30, 2005, by and among the Company,
AFN
Acquisition Corp., American Fiber Network, Inc. and the individuals
and
entities identified therein
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on July 6, 2005
|
|
2.20
|
Agreement
and Plan of Merger, dated October 31, 2005, by and among the Company,
InReach Internet, Inc., InReach Internet, LLC, and Balco Holdings,
Inc.
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed on November 7, 2005
|
|
2.21
|
Form
of assignment of Limited Liability Company Interest/Release, dated
January
31, 2006
|
|
Incorporated
by reference to Exhibit 2.21 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
|
2.22
|
Agreement
and Plan of Merger, dated January 31, 2006, by and among Mobilepro
Corp.,
Kite Acquisition Corp. and Kite Networks, Inc.
|
|
Incorporated
by reference to Exhibit 2.22 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
|
3.1
|
Certificate
of Incorporation, dated April 20, 2001, of Registrant
|
|
Incorporated
by reference to Exhibit 3.1 to the Registrant’s Registration Statement on
Form S-8 filed on May 11, 2001
|
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation of Mobilepro Corp dated
November 16, 2001.
|
|
Incorporated
by reference to Exhibit 3.1 to the Registrant’s Registration Statement on
Form S-8 filed on December 4, 2001
|
|
3.3
|
Certificate
of Amendment to Certificate of Incorporation of Mobilepro Corp. dated
March 11, 2003
|
|
Incorporated
by reference to Exhibit 3.11 to the Registrant’s Registration Statement on
Form SB-2 filed on May 6, 2003
|
|
3.4
|
By-Laws
of Registrant
|
|
Incorporated
by reference to Exhibit 3.2 to the Registrant’s Registration Statement on
Form S-8 filed on May 11, 2001
|
|
4.1
|
2001
Equity Performance Plan
|
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Registration Statement on
Form S-8 filed on December 4, 2001
|
|
4.2
|
Amended
and Restated 2001 Equity Performance Plan
|
|
Incorporated
by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form
10-KSB filed on June 29, 2004
|
|
4.3
|
Registration
Rights Agreement, dated September 16, 2004, by and among the Company
and
the persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
4.4
|
Registration
Rights Agreement, dated November 15, 2004, by and among the Company
and
the persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
|
4.5
|
Form
of Warrant issued on November 15, 2004
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
|
4.6
|
Registration
Rights Agreement, dated June 30, 2005, by and among the Company and
the
persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed on July 6, 2005
|
|
4.7
|
Registration
Rights Agreement, dated November 1, 2005, by and among the Company
and the
persons and entities identified therein
|
|
Incorporated
by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K
filed on November 7, 2005
|
|
10.1
|
Executive
Employment Agreement, dated December 15, 2003, between Jay O. Wright
and
the Company
|
|
Incorporated
by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-QSB filed on February 13, 2004
|
|
10.2
|
Executive
Employment Agreement, dated April 15, 2004 between Jay O. Wright
and the
Company
|
|
Incorporated
by reference to Exhibit 10.15 to the Amendment to Registrant’s
Registration Statement on Form SB-2 filed on May 14, 2004
|
|
10.3
|
Amended
and Restated Executive Employment Agreement, dated June 9, 2004 between
Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on June 15, 2004
|
|
10.4
|
Standby
Equity Distribution Agreement, dated May 13, 2004 between the Company
and
Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.20 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
|
10.5
|
Registration
Rights Agreement, dated May 13, 2004 between the Company and Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.21 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
|
10.6
|
Placement
Agent Agreement, dated May 13, 2004 between the Company and Newbridge
Securities Corporation
|
|
Incorporated
by reference to Exhibit 10.22 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
|
10.7
|
Escrow
Agreement, dated May 13, 2004 between the Company and Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.23 to the Registrant’s Registration Statement
on Form SB-2 filed on May 14, 2004
|
|
10.8
|
Consulting
Agreement by and among Mobilepro Corp., DFW Internet Services, Inc.,
Beech
Holdings, Inc., and Jack W. Beech, Jr.
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on February 4, 2004
|
|
10.9
|
Promissory
Note issued by the Company to Cornell Capital on August 23,
2004
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.10
|
Security
Agreement between the Company and Cornell Capital dated August 23,
2004
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.11
|
Promissory
Note issued by the Company to Cornell Capital on August 25,
2004
|
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
1012
|
Security
Agreement between the Company and Cornell Capital dated August 25,
2004
|
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.13
|
Letter
Agreement between the Company and Cornell Capital dated August 27,
2004
|
|
Incorporated
by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.14
|
Promissory
Note issued by the Company to Cornell Capital on August 27,
2004
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on October 19, 2004
|
|
10.15
|
Security
Agreement between the Company and Cornell Capital dated August 27,
2004
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on October 19, 2004
|
|
10.16
|
Promissory
Note issued by the Company to Cornell Capital on September 22,
2004
|
|
Incorporated
by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.17
|
Security
Agreement between the Company and Cornell Capital dated September
22,
2004
|
|
Incorporated
by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form
10-QSB filed on November 15, 2004
|
|
10.18
|
Executive
Employment Agreement by and among the Company, CloseCall America,
Inc. and
Tom Mazerski
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on October 19, 2004
|
|
10.19
|
Credit
Agreement, dated November 15, 2004, by and among the Company, Davel
Acquisition Corp. and Airlie Opportunity Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on November 17, 2004
|
|
10.20
|
Employment
Agreement dated February 28, 2005 between Davel Communications, Inc.
and
Tammy L. Martin
|
|
Incorporated
by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.21
|
Amendment
No. 1 to Employment Agreement between Davel Communications, Inc.
and Tammy
L. Martin, dated April 20, 2005
|
|
Incorporated
by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.22
|
Amendment
No. 2 to Employment Agreement between Davel Communications, Inc.
and Tammy
L. Martin, dated May 26, 2005
|
|
Incorporated
by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.23
|
Amended
and Restated Executive Employment Agreement, dated June 16, 2005
between
Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on June 20, 2005
|
|
10.24
|
Amended
and Restated Executive Employment Agreement, dated June 16, 2005
by and
among the Company, CloseCall America, Inc. and Tom Mazerski
|
|
Incorporated
by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.25
|
Securities
Purchase Agreement, dated as of May 13, 2005, by and between the
Company
and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.26
|
Secured
Convertible Debenture, issued on May 13, 2005 by the Company to Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.27
|
Amended
and Restated Collateral Assignment of Intellectual Property Rights,
made
as of May 13, 2005, by and among the Company, the Company subsidiaries
identified therein and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.28
|
Amended
and Restated Security Agreement, dated May 13, 2005, by and among
the
Company, the subsidiaries identified therein and Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.29
|
Investor
Registration Rights Agreement, dated as of May 13, 2005 by and between
the
Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.30
|
Amended
and Restated Guaranty Agreement, dated as of May 13, 2005, made by
each of
the direct and indirect subsidiaries of the Company in favor of Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.31
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form
10-KSB filed on June 28, 2005
|
|
10.32
|
Master
Agreement for Services between Sprint Communications Company L.P.
and Kite
Broadband, LLC, dated May 20, 2005*
|
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-QSB filed November
14, 2005
|
|
10.33
|
Agreement
between the City of Tempe and NeoReach, Inc. for the Use of City
Property
in Connection with the Operation of a WiFi Network, dated August
17,
2005
|
|
Incorporated
by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form
10-KSB filed on June 29, 2006
|
|
10.34
|
Executive
Employment Agreement dated February 1, 2006, between Jerry M.
Sullivan, Jr. and the Company
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed February 13, 2005
|
|
10.35
|
Secured
Convertible Debenture, issued on June 30, 2006 by the Company to
Cornell
Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed July 7, 2006
|
|
10.36
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.40 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
|
10.37
|
Master
Lease Agreement dated June 28, 2006 between JTA Leasing Co., LLC,
Mobilepro Corp., and NeoReach, Inc.
|
|
Incorporated
by reference to Exhibit 10.41 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2006
|
|
10.38
|
Letter
Agreement between American Fiber Network, Inc. and FSH Communications
LLC,
dated June 30, 2006*
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K, dated July 11, 2006
|
|
10.39
|
Securities
Purchase Agreement, dated as of August 28, 2006, by and between the
Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
|
10.40
|
Secured
Convertible Debenture, issued on August 28, 2006, by the Company
to
Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
|
10.41
|
Investor
Registration Rights Agreement, dated as of August 28, 2006, by and
between
the Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
|
10.42
|
Irrevocable
Transfer Agent Instructions dated August 28, 2006 among the Company,
Interwest Transfer Company, Inc. and David Gonzalez, Esq., as Escrow
Agent
|
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
|
10.43
|
Warrant
issued by the Company to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on August 30, 2006
|
|
10.44
|
Amendment
No. 1 to the Securities Purchase Agreement, dated September 20, 2006,
between the Company and Cornell Capital, and the related Convertible
Debenture
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on September 21, 2006
|
|
10.45
|
Amendment
No. 2 to the Securities Purchase Agreement, dated October 23, 2006,
between the Company and Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on October 24, 2006
|
|
31.1
|
Certification
by Jay O. Wright, Chief Executive Officer, pursuant to Rule
13a-14(a)
|
|
Provided
herewith
|
|
31.2
|
Certification
by Richard H. Deily, Principal Financial Officer, pursuant to Rule
13a-14(a)
|
|
Provided
herewith
|
|
32.1
|
Certification
by Jay O. Wright, and Richard H. Deily, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002**
|
|
Provided
herewith
|
|
10.46
|
Master
Equipment Lease dated September 27, 2006, between Data Sales Co.,
Mobilepro Corp., and Kite Networks, Inc.
|
|
Provided
herewith
|
|
99.1
|
Press
Release dated December 28, 2005 regarding corporate
restructuring
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant's Current Report on
Form
8-K filed January 1, 2006
|
|
*
Confidential treatment has been requested for certain portions of this document
pursuant to an application for confidential treatment sent to the Securities
and
Exchange Commission. Such portions are omitted from this filing and filed
separately with the Securities and Exchange Commission.
**
These
certifications are not deemed filed by the SEC and are not to be incorporated
by
reference in any filing of the Registrant under the Securities Act of 1933
or
the Securities Exchange Act of 1934, irrespective of any general incorporation
language in any filings.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
MOBILEPRO
CORP. |
|
|
|
Date: November
9, 2006 |
By: |
/s/ Jay
O.
Wright |
|
|
Jay
O. Wright, Chief Executive Officer |
|
|
|
Date: November
9, 2006 |
By: |
/s/ Richard H. Deily |
|
|
Richard
H. Deily, Chief Accounting
Officer |