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 June 30, 2007
Commission
File Number 000-51010
MOBILEPRO
CORP.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
87-0419571
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
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 registrant (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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
|
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 August 3, 2007, the Company
had
775,079,608 outstanding shares of its common stock, $0.001 par value per
share.
TABLE
OF CONTENTS
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PAGE
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ITEM
NUMBER AND CAPTION
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|
|
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PART
I
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|
FINANCIAL
INFORMATION
|
|
3
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|
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ITEM
1.
|
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FINANCIAL
STATEMENTS
|
|
3
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NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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|
8
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ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
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22
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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30
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ITEM
4.
|
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CONTROLS
AND PROCEDURES
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|
30
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PART
II
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OTHER
INFORMATION
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33
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ITEM
1.
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LEGAL
PROCEEDINGS
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33
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ITEM
1A.
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RISK
FACTORS
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34
|
ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
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39
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ITEM
3.
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DEFAULTS
UPON SENIOR SECURITIES
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|
40
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ITEM
4.
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|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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|
40
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ITEM
5.
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OTHER
INFORMATION
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40
|
ITEM
6.
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EXHIBITS
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41
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SIGNATURES
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46
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PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June
30,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,746,910
|
|
$
|
1,993,781
|
|
Restricted
cash
|
|
|
400,000
|
|
|
400,000
|
|
Accounts
receivable, net
|
|
|
2,683,099
|
|
|
3,222,726
|
|
Prepaid
expenses and other current assets
|
|
|
681,541
|
|
|
693,717
|
|
Assets
of companies held for sale
|
|
|
51,221,301
|
|
|
52,316,429
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
56,732,851
|
|
|
58,626,653
|
|
|
|
|
|
|
|
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FIXED
ASSETS, NET OF ACCUMULATED DEPRECIATION
|
|
|
7,800,953
|
|
|
8,414,561
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|
|
|
|
|
|
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OTHER
ASSETS
|
|
|
|
|
|
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|
Customer
contracts and relationships, net of amortization
|
|
|
1,214,322
|
|
|
1,333,516
|
|
Other
assets
|
|
|
875,324
|
|
|
934,191
|
|
|
|
|
|
|
|
|
|
|
|
|
2,089,646
|
|
|
2,267,707
|
|
|
|
|
|
|
|
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|
TOTAL
ASSETS
|
|
$
|
66,623,450
|
|
$
|
69,308,921
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
|
|
June
30,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
portion of convertible debentures
|
|
$
|
9,790,425
|
|
$
|
15,101,081
|
|
Note
payable
|
|
|
1,100,000
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
9,003,708
|
|
|
8,557,629
|
|
Deferred
revenue
|
|
|
600,000
|
|
|
600,000
|
|
Liabilities
of companies held for sale
|
|
|
20,432,399
|
|
|
20,199,192
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
40,926,532
|
|
|
44,457,902
|
|
|
|
|
|
|
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LONG-TERM
LIABILITIES
|
|
|
|
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|
Convertible
debentures, net of unamortized debt discount and
|
|
|
|
|
|
|
|
current
portion
|
|
|
6,389,095
|
|
|
2,892,751
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
6,389,095
|
|
|
2,892,751
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
47,315,627
|
|
|
47,350,653
|
|
|
|
|
|
|
|
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|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
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|
Preferred
stock, $.001 par value, 20,035,425 shares authorized,
|
|
|
|
|
|
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|
35,378
shares issued and outstanding at June 30, 2007 and March 31,
2007
|
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|
35
|
|
|
35
|
|
Common
stock, $.001 par value, 1,500,000,000 shares authorized,
|
|
|
|
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775,079,608
and 692,477,518 shares issued and outstanding
|
|
|
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|
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|
at
June 30, 2007 and March 31, 2007
|
|
|
775,080
|
|
|
695,592
|
|
Additional
paid-in capital
|
|
|
100,792,618
|
|
|
98,533,886
|
|
Accumulated
deficit
|
|
|
(82,259,910
|
)
|
|
(77,271,245
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
19,307,823
|
|
|
21,958,268
|
|
|
|
|
|
|
|
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|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
66,623,450
|
|
$
|
69,308,921
|
|
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
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
REVENUES
|
|
$
|
5,967,820
|
|
$
|
8,197,498
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
3,564,786
|
|
|
4,770,713
|
|
Payroll,
professional fees and related expenses (exclusive of stock
compensation)
|
|
|
3,590,133
|
|
|
4,152,514
|
|
Office
rent and expenses
|
|
|
152,373
|
|
|
205,139
|
|
Other
general and administrative expenses
|
|
|
385,243
|
|
|
254,200
|
|
Depreciation
and amortization
|
|
|
717,181
|
|
|
760,737
|
|
Stock
compensation
|
|
|
200,553
|
|
|
485,091
|
|
Restructuring
charges
|
|
|
-
|
|
|
281,635
|
|
Total
Operating Costs and Expenses
|
|
|
8,610,269
|
|
|
10,910,029
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(2,642,449
|
)
|
|
(2,712,531
|
)
|
|
|
|
|
|
|
|
|
INTEREST
AND OTHER EXPENSE, NET
|
|
|
(630,725
|
)
|
|
(503,651
|
)
|
|
|
|
|
|
|
|
|
LOSS
ON EXTINGUISHMENT OF DEBT
|
|
|
-
|
|
|
(409,601
|
)
|
LOSS
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(3,273,174
|
)
|
|
(3,625,783
|
)
|
Provision
for Income Taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(3,273,174
|
)
|
|
(3,625,783
|
)
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
Loss
from operations of discontinued operations
|
|
|
(1,715,491
|
)
|
|
(1,111,724
|
)
|
Income
tax benefit
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
(1,715,491
|
)
|
|
(1,111,724
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE TO COMMON SHARES
|
|
$
|
(4,988,665
|
)
|
$
|
(4,737,507
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.0066
|
)
|
$
|
(0.0082
|
)
|
Diluted
|
|
$
|
(0.0066
|
)
|
$
|
(0.0082
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
754,536,951
|
|
|
580,059,290
|
|
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 Three Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,988,665
|
)
|
$
|
(4,737,507
|
)
|
Loss
from discontinued operations
|
|
|
1,715,491
|
|
|
1,111,724
|
|
Loss
from continuing operations
|
|
|
(3,273,174
|
)
|
|
(3,625,783
|
)
|
Items
that reconcile net loss to net cash
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
717,181
|
|
|
760,737
|
|
Noncash
interest expense and loss on debt extinguishment
|
|
|
304,239
|
|
|
644,535
|
|
Common
stock issued for services
|
|
|
200,553
|
|
|
521,091
|
|
Restructuring
charges
|
|
|
-
|
|
|
281,635
|
|
Gain
on the sale of fixed assets
|
|
|
(21,300
|
)
|
|
-
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
539,627
|
|
|
725,522
|
|
Decrease
in other assets
|
|
|
71,054
|
|
|
238,424
|
|
(Increase)
decrease in net assets of companies held for sale
|
|
|
(143,700
|
)
|
|
500,033
|
|
Increase
(decrease) in accounts payable and
|
|
|
|
|
|
|
|
and
accrued expenses
|
|
|
493,822
|
|
|
(2,318,254
|
)
|
Increase
in deferred revenue
|
|
|
-
|
|
|
600,000
|
|
|
|
|
2,161,476
|
|
|
1,953,723
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) operating activities
|
|
|
(1,111,698
|
)
|
|
(1,672,060
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
84,162
|
|
|
(328,735
|
)
|
Purchase
of certificate of deposit
|
|
|
-
|
|
|
(50,000
|
)
|
Investing
activities of discontinued operations
|
|
|
(87,013
|
)
|
|
(1,931,651
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(2,851
|
)
|
|
(2,310,386
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
proceeds from common stock issuances
|
|
|
-
|
|
|
6,661,669
|
|
Borrowings/(payments)
of debt, net
|
|
|
1,070,164
|
|
|
(3,600,000
|
)
|
Financing
activities of discontinued operations
|
|
|
(543,595
|
)
|
|
(78,125
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
526,569
|
|
|
2,983,544
|
|
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 Three Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$
|
(587,980
|
)
|
$
|
(998,902
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
3,430,844
|
|
|
5,397,881
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
|
2,842,864
|
|
|
4,398,979
|
|
|
|
|
|
|
|
|
|
LESS
CASH AND CASH EQUIVALENTS OF DISCONTINUED
OPERATIONS
|
|
|
(1,095,954
|
)
|
|
(2,241,883
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
|
|
$
|
1,746,910
|
|
$
|
2,157,096
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
6,614
|
|
$
|
1,006,018
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment
to convertible debenture maturity schedules
|
|
$
|
5,288,656
|
|
$
|
-
|
|
Retirement
of convertible debentures and accrued interest with common
stock
|
|
$
|
1,967,908
|
|
$
|
-
|
|
Amortization
of SEDA deferred financing fees
|
|
$
|
-
|
|
$
|
147,000
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(unaudited)
NOTE
1-ORGANIZATION
Overview
MobilePro
Corp., incorporated under the laws of the State of Delaware in July 2000,
is an
integrated telecommunication services company that has delivered 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 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 has included 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 Overland Park, Kansas. The Company’s Internet services
segment has included 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 were 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 included 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. . The corporate segment has included our Internet gaming
subsidiary, ProGames Network, Inc. (“ProGames”), that we founded in December
2005.
On
June
30, 2007, the Company entered into a Purchase Agreement (the “USA Agreement”)
with United Systems Access, Inc. (“USA”), pursuant to which USA agreed to
acquire all of the outstanding shares of CloseCall and AFN (the Company’s “CLEC
Business”, which was previously included in the voice services business segment)
and all of the outstanding shares of DFW and InReach (together these companies
have comprised the Company’s Internet services provider business segment, or
“ISP Business” - see Note 3).
On
July
8, 2007, the Company entered into a Purchase Agreement (the “Gobility
Agreement”) with Gobility, Inc. (“Gobility”), pursuant to which Gobility
acquired all of the outstanding shares of NeoReach and Kite Networks, and
all of
the outstanding membership interests in Kite Broadband (together these
companies
have comprised the Company’s wireless networks business segment, or “Wireless
Networks” - see Note 3).
Going
Concern Uncertainty
The
Company has historically lost money. The Company’s accumulated deficit at June
30, 2007 was $82,259,910. In the three months ended June 30, 2007, the
Company
incurred a net loss of $4,988,665. In the fiscal years ended March 31,
2007,
2006 and 2005, the Company sustained net losses of $45,898,288, $10,176,407
and
$5,359,722, respectively. Over these periods, most of the acquired businesses
of
Mobilepro have experienced declining revenues. Although restructuring measures
have reduced other operating expenses, the Company has been unable to reduce
the
corresponding costs of services. In addition, the Company has funded the
start-up and operations of the municipal wireless networks and online gaming
businesses without these companies achieving expected revenues. As a result,
the
amounts of cash used in operations during the three months ended June 30,
2007
and the fiscal year ended March 31, 2007 were $1,111,698 and $6,558,708,
respectively. Future losses are likely to occur. Accordingly, the Company
will
continue to experience liquidity and cash flow problems if it is unable
to
improve its operating performance, to sell assets for cash, or to raise
additional capital as needed and on acceptable terms.
In
December 2006, the Company engaged an investment banking firm to assist
in
evaluating strategic alternatives for the wireless networks business conducted
by its Kite Networks and Kite Broadband subsidiaries. Efforts to secure
investment capital for this business or to find a willing buyer resulted
in the
Company selling these companies to Gobility. Despite obtaining lease financing
and deferring payments to several large vendors, the Company was required
to
fund the operations of these businesses through the date of the sale. For
the
three months ended June 30, 2007, the net loss of this business segment
was
$1,983,293.
In
March
2007, the Company announced that it had signed a definitive agreement for
the
merger of ProGames, its online gaming subsidiary, with and into Winning
Edge
International, Inc. Consummation of the transaction was subject to a number
of
closing conditions including the arrangement of financing that would have
sustained the operations of the combined entity. Financing has not been
arranged. As a result, the merger agreement was terminated and the Company
continues to fund the operating costs of ProGames. The net loss incurred
by
ProGames in the three months ended June 30, 2007 was $232,289.
The
operating losses incurred by Davel continue to adversely affect the consolidated
operating results of the Company. As a result, we have intensified efforts
to
sell groups of payphones to other operators and to remove remaining unprofitable
payphones. In June 2007, the Company sold approximately 730 operating payphones
and received in excess of $200,000 in cash proceeds. Despite these actions,
Davel incurred a net loss of $1,505,161 for the three months ended June
30,
2007.
To
date,
Cornell Capital Partners, L.P. (“Cornell Capital”) has been a significant source
of capital for the Company, providing financing in several forms. During
the
fiscal year ended March 31, 2007, the Company borrowed funds under a series
of
convertible debentures. The total principal and accrued interest amounts
owed to
Cornell Capital under the debentures at June 30, 2007 were $16,199,650
and
$428,789, respectively. Using shares of its common stock registered on
Form S-3
in November 2006, the Company made principal and interest payments on the
debentures that totaled $4,880,489 during the fiscal year ended March 31,
2007,
and that totaled $1,967,908 from April 2007 through May 2007. However,
the
supply of shares registered that related to the convertible debentures
has been
exhausted. Cornell Capital has agreed to delay additional installment payments
until January 1, 2008 when the Company will be obligated to resume making
total
weekly principal payments of $375,000 plus accrued interest. Unless additional
shares are registered by the Company under the Securities Act of 1933 (the
“Securities Act”), shares acquired by Cornell Capital are tradable under Rule
144 of the Securities Act, or shares of the Company’s common stock are otherwise
freely tradable by Cornell Capital without restriction, the Company will
be
required to make these payments in cash. However, in the event that the
Company
or Cornell Capital receives a legal opinion that Cornell Capital is eligible
to
sell shares of the Company’s common stock under Rule 144, the Company will be
required to resume making weekly payments of principal and accrued interest
with
shares of its common stock in September 2007.
In
April
2007, the Company announced that its Board of Directors had decided to
explore
potential strategic alternatives for the entire Company, and that it had
received inquiries from potential buyers regarding the purchase of portions
of
its business. This initiative was undertaken with the goals of maximizing
the
value of the Company’s assets, returning value to the Company’s stockholders and
eliminating the Company’s debt, particularly amounts payable to Cornell Capital.
The
Company received letters of interest regarding the acquisition of the CloseCall,
AFN and the Internet service provider businesses. As disclosed above, on
June
30, 2007, the Company entered into an agreement to sell the CLEC and ISP
Businesses to USA. The total purchase price of $30 million includes cash
proceeds of approximately $21.9 million and convertible preferred stock
valued
at $8.1 million.
With
the
cash proceeds expected to be received by the Company from the sale of the
CLEC
and ISP Businesses, the Company intends to retire the Cornell Capital
debentures, plus accrued interest, at the time that cash proceeds are received.
In May 2007, the Company borrowed $1,100,000 from Cornell Capital under
a
promissory note in order to help bridge the Company’s cash flow shortfall until
the sale of the CLEC Business is completed.
If
the
Company fails to permanently eliminate the cash requirements represented
by the
Wireless Networks Business, Davel and ProGames, and if a sale of the Wireline
Business is not consummated on its negotiated terms by December 31, 2007,
the
Company will not have the ability to continue as a going concern beyond
the
third quarter of the current fiscal year without additional capital and
a
significant restructuring of the Cornell Capital debt. Although the consolidated
financial statements have been prepared on a going-concern basis, the Company
recorded substantial impairment charges at March 31, 2007 related to the
goodwill of the Wireless Networks and ISP Businesses and certain fixed
and
intangible assets of Davel and Kite Networks.
Companies
Held for Sale
The
assets and liabilities of the businesses covered by the purchase agreements
described above, including the Wireless Networks, CLEC and ISP Businesses,
are
summarized and classified as “held for sale” in the accompanying balance sheets
at June 30, 2007 and March 31, 2007. In addition, the operating results
of these
businesses are included in discontinued operations in the accompanying
statements of operations for the three months ended June 30, 2007 and
2006.
NOTE
2-SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statement Presentation
The
consolidated financial statements include the accounts of the Company and
its
subsidiaries. All significant inter-company accounts and transactions have
been
eliminated in consolidation. Certain prior-period financial statement balances
have been reclassified to conform to the June 30, 2007
presentation.
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-K for the
fiscal year ended March 31, 2007. 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
months
ended June 30, 2007 are not necessarily indicative of the results that
will be
achieved for the fiscal year ending March 31, 2008.
Restricted
Cash
The
Company is required to maintain letters of credit collateralized by cash
as
additional security for the performance of obligations under certain service
agreements. The cash collateral is restricted and is not available for
the
Company’s general working capital needs. The letters of credit expire at various
dates through September 2008.
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.
Non-coin
operator service calls are handled by independent operator service providers.
These carriers assume billing and collection responsibilities for
operator-assisted calls originating on Davel’s payphone network and pay
commissions to Davel based upon gross revenue. Davel recognizes revenue
related
to operator service calls in amounts equal to the commissions that it is
entitled to receive in the periods that the services are rendered.
Davel
also recognizes revenue related to non-coin dial-around calls that are
initiated
from a Company payphone in order to gain access to a specific long distance
company or to make a standard toll free call. Revenue related to such
dial-around calls is recognized initially 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 one year. Most dial-around receivable amounts
are received early in each calendar quarter from an industry clearinghouse
organization, one quarter in arrears. For example, Davel received its
dial-around receipts related to the quarter ended March 31, 2007 in July
2007,
allowing it to adjust the first calendar quarter dial-around receivable
amount
included in the balance sheet at June 30, 2007 based on the actual collection
experience. Davel’s estimate of revenue for the most recent calendar quarter is
based on the historical analysis of calls placed and amounts collected.
These
analyses are updated on a periodic basis. Recorded amounts of revenue may
be
adjusted based on actual receipts and/or the subsequent revision of prior
estimates. Total dial-around revenue amounts for the three months ended
June 30,
2007 and 2006 were approximately $1,245,717 and $1,620,274, respectively.
In
connection with the right to provide cellular-based services to users of
personal data assistants (“PDAs”), the Company has the right to resell PDA
equipment, software and related maintenance agreements to such customers.
As the
Company has no continuing obligations to the purchasers of such products,
the
Company generally records revenue related to the delivery of such products
upon
shipment.
Accounts
Receivable
Dial-around
receivable amounts included in the balance sheets at June 30, 2007 and
March 31,
2007 were $2,471,043 and $2,856,629, respectively. During all periods presented,
credit losses, to the extent identifiable, were generally within management’s
overall expectations.
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, in the prior year, 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 $147,000 in the three months ended June 30,
2006,
completing the amortization of the cost of the deferred asset.
Accounting
for Stock Options and Warrants
The
Company adopted SFAS 123R, effective April 1, 2006. The amounts of related
compensation expense recorded and presented in the accompanying statements
of
operations for the three-month periods ended June 30, 2007 and 2006 were
$200,553 and $485,091, respectively.
Property,
Plant and Equipment
Depreciation
expense is computed using the straight-line method during the estimated
useful
life of each asset. The amounts of depreciation related to continuing operations
and included in the condensed consolidated statements of operations for
the
three months ended June 30, 2007 and 2006 were approximately $586,274 and
$603,532, respectively.
Customer
Location Contracts
Intangible
assets include amounts paid to property location owners in connection with
payphone installation contracts with net balances of $1,007,769 and $1,174,205
at June 30, 2007 and March 31, 2007, respectively. These other assets are
amortized on a straight-line basis over their estimated useful lives based
on
contract terms (generally 5 years). Accumulated amortization related to
these
contracts at June 30, 2007 and March 31, 2007 was $1,352,367 and $1,261,428,
respectively. Amortization expense related to location contracts was $130,908
and $157,206, respectively, for the three months ended June 30, 2007 and
2006.
Investments
During
the year ended March 31, 2005, the Company provided certain management
services
to two emerging technology firms. As consideration, the Company received
a
non-affiliate equity interest in each firm. These investments were recorded
in
the amounts of $300,000 and $150,000, respectively, approximating the value
of
the services provided. The shares of common stock held by the Company are
considered to be available-for-sale securities. If a decline in the fair
value
of these securities is judged by management to be other than temporary,
the cost
basis of the securities would be written down to fair value at that time.
The
cost basis of the common stock included in other assets at June 30, 2007
and
March 31, 2007 was $443,281 and $450,000, respectively.
Accounts
Payable and Accrued Liabilities
The
accounts payable and accrued liabilities of continuing operations consisted
of
the following at the indicated dates:
|
|
June
30, 2007
|
|
March
31, 2007
|
|
Accounts
payable
|
|
$
|
3,868,470
|
|
$
|
4,169,687
|
|
Accrued
location usage fees
|
|
|
2,185,891
|
|
|
1,800,991
|
|
Accrued
restructuring costs
|
|
|
100,218
|
|
|
100,218
|
|
Accrued
compensation
|
|
|
501,874
|
|
|
449,021
|
|
Accrued
interest expense
|
|
|
446,871
|
|
|
161,950
|
|
Other
accrued liabilities
|
|
|
1,900,384
|
|
|
1,875,762
|
|
Totals
|
|
$
|
9,003,708
|
|
$
|
8,557,629
|
|
NOTE
3-DISPOSITION
OF BUSINESSES
Sale
of the ISP and CLEC Businesses
On
June
30, 2007, the Company entered into a Purchase Agreement with USA, pursuant
to which USA agreed to acquire all of the outstanding shares of CloseCall,
AFN,
DFW and InReach. The USA Agreement was subsequently amended to extend the
closing date for the sale of the ISP Business until July 17, 2007. The
closing
for the CLEC Business will take place following receipt of the necessary
regulatory approvals. Until the closing, USA will manage the CLEC Business
pursuant to a management agreement entered into with USA (the “USA Management
Agreement”).
The
total
purchase price for the ISP and CLEC Businesses is $30.0 million, consisting
of
$21.9 million in cash and $8.1 million in convertible preferred stock of
USA
(the “USA Preferred”). The 8,100 shares of USA Preferred is convertible into
7.5% of the outstanding common stock of USA and can be redeemed for $8.1
million
in cash, at the option of the Company, anytime following the third anniversary
of the closing of the CLEC Business. Prior to that time, USA has the option
to
redeem all of the unconverted USA Preferred for $12,960,000.
Upon
the
closing of the sale of the ISP Business on July 18, 2007, the Company received
$2.5 million in cash, a $2 million note, which is payable upon the earlier
of
the closing of the CLEC Business or January 1, 2008, and the $8.1 million
of USA
Preferred. The loss incurred in connection with this sale, if any, is not
expected to be significant.
Sale
of the Wireless Networks Business
On
July
8, 2007, the Company entered into a Purchase Agreement with Gobility, pursuant
to which Gobility acquired all of the outstanding shares of Neoreach and
Kite
Networks, and all of the outstanding membership interests in Kite Broadband.
The
purchase price was $2.0 million, paid in the form of a debenture that is
convertible into shares of Gobility common stock (the “Gobility Debenture”) at a
rate of $5.00 per share, or such lower price, if Gobility issues common
stock or
securities convertible into common stock at a price that is less than $5.00
per
share. Unless converted, the Gobility debenture is due July 8, 2009 with
annual
interest at 8%. The Company expects to recognize a gain on the sale of
Wireless
Networks of approximately $1.1 million, net of income tax, in the second
fiscal
quarter ending September 30, 2007.
Under
the
terms of the Gobility Debenture, Gobility is required to raise at least
$3.0
million in cash no later than August 15, 2007. If Gobility defaults on
the
financing obligation under the Gobility Debenture, the Company will have
the
right but not the obligation to repurchase the Wireless Networks business
with
the surrender of the Gobility Debenture and the payment of nominal additional
consideration. In this case, the gain described above would be
reversed.
Discontinued
Operations
Revenues,
operating costs and expenses, and other income and expense attributable
to the
Wireless Networks, ISP and CLEC Businesses have been aggregated to a single
line, loss from discontinued operations, in the condensed consolidated
statements of operations for all periods presented. The Company has no
income
taxes due to operating losses incurred for tax purposes. No interest expense,
other than amounts relating to the capital leases or other debt recorded
by the
discontinued businesses, has been allocated to discontinued operations.
The
revenues and the net losses of discontinued operations were as
follows:
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
15,010,201
|
|
$
|
15,145,288
|
|
Loss
from discontinued operations before disposal
|
|
$
|
(1,715,491
|
)
|
$
|
(1,111,724
|
)
|
Estimated
loss on disposal
|
|
|
—
|
|
|
—
|
|
Loss
from discontinued operations
|
|
$
|
(1,715,491
|
)
|
$
|
(1,111,724
|
)
|
Assets
and liabilities associated with the Wireless Networks, ISP and CLEC Businesses
have been segregated from continuing operations and presented separately
as
assets of companies held for sale and liabilities of companies held for
sale in
the condensed consolidated balance sheets at June 30, 2007 and March 31,
2007.
The major classifications of such assets and liabilities were as follows:
|
|
June
30
2007
|
|
March
31
2007
|
|
Cash
and cash equivalents
|
|
$
|
1,095,954
|
|
$
|
1,437,063
|
|
Restricted
cash
|
|
|
1,904,864
|
|
|
1,798,200
|
|
Accounts
receivable, net
|
|
|
5,191,255
|
|
|
5,387,772
|
|
Prepaid
expenses and other current assets
|
|
|
2,423,693
|
|
|
2,401,464
|
|
Fixed
assets, net
|
|
|
9,804,550
|
|
|
10,368,844
|
|
Goodwill,
net of impairment
|
|
|
29,547,074
|
|
|
29,547,074
|
|
Customer
contracts and relationships, net
|
|
|
495,179
|
|
|
593,734
|
|
Other
assets
|
|
|
758,732
|
|
|
782,278
|
|
Assets
of companies held for sale
|
|
$
|
51,221,301
|
|
$
|
52,316,429
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
11,806,070
|
|
$
|
11,222,807
|
|
Deferred
revenue
|
|
|
3,666,480
|
|
|
3,864,518
|
|
Notes
payable and other long-term liabilities
|
|
|
4,959,849
|
|
|
5,111,867
|
|
Liabilities
of companies held for sale
|
|
$
|
20,432,399
|
|
$
|
20,199,192
|
|
NOTE
4-IMPAIRMENT
OF GOODWILL AND LONG-LIVED ASSETS
The
goodwill included in assets of companies held for sale at June 30, 2007
and
March 31, 2007 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 value of goodwill amounts
relating to 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 amounts of goodwill for reporting segments have been reduced below
the
corresponding carrying amounts. 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.
During
the fiscal year ended March 31, 2007, the Wireless Networks business, the
ISP
Business and Davel did not perform as expected. In addition, as discussed
above,
the Company was engaged in negotiations for the sale of all of these businesses.
As a result, management reviewed the carrying values of the assets of these
businesses at March 31, 2007 and determined that adjustments for goodwill
and
other asset impairment were appropriate. The Company recorded impairment
charges
in the total amount of $25,185,098 at March 31, 2007, including $17,745,303
representing the entire amount of goodwill and other intangible assets
related
to Wireless Networks, $4,384,000 relating to the goodwill of the ISP Business,
$1,482,000 relating to certain deployed wireless network equipment of Kite
Networks, and $1,573,795 relating to certain payphone equipment and location
contracts of Davel. The Company had previously recorded goodwill impairment
charges related to the ISP Business including $348,118 in the fiscal quarter
ended June 30, 2006; this amount is included in the loss from discontinued
operations for the three months ended June 30, 2006. Management does not
believe
that additional goodwill impairment charges are required at June 30,
2007.
NOTE
5-DEBT
Debt
Maturities
A
summary
of the balances owed under the debentures, capital leases, notes payable,
and
other long-term liabilities of continuing operations at June 30, 2007 and
March
31, 2007 was as follows:
|
|
June
30,
2007
|
|
March
31,
2007
|
|
Amended
Debenture issued to Cornell Capital
|
|
$
|
12,578,828
|
|
$
|
12,649,650
|
|
Secured
Debentures issued to Cornell Capital
|
|
|
3,620,822
|
|
|
5,500,000
|
|
Notes
payable to Cornell Capital
|
|
|
1,100,000
|
|
|
-
|
|
Other
notes payable and long-term obligations
|
|
|
118,500
|
|
|
138,500
|
|
|
|
|
17,418,150
|
|
|
18,288,150
|
|
Less:
Unamortized debt discounts
|
|
|
(138,630
|
)
|
|
(294,318
|
)
|
Less:
Amounts due within one year
|
|
|
(10,890,425
|
)
|
|
(15,101,081
|
)
|
Long-term
portion of debt
|
|
$
|
6,389,095
|
|
$
|
2,892,751
|
|
Based
on
the current terms of the Cornell Capital debentures, as amended, the entire
long-term portion of debt at June 30, 2007 will become due for payment
in the
twelve-month period ending June 30, 2009.
The
Secured Debenture Agreement
On
August
28, 2006, the Company entered into a financing agreement with Cornell Capital
that provided $7.0 million in debt financing with the proceeds received
in a
series of four closings (the “Secured Debenture Agreement”). At each closing,
the Company issued Cornell Capital a 7.75% secured convertible debenture
in the
gross amount for the closing, convertible into shares of common stock at
$0.174
per share. The Company received cash proceeds of $6,495,000, net of financing
fees of $505,000. In addition, Cornell Capital was issued warrants to purchase
10,000,000 additional shares of common stock at an exercise price of $0.174
per
share, as amended.
The
debentures issued pursuant to the Secured Debenture Agreement were recorded
in
the balance sheet net of unamortized debt discounts reflecting the fair
market
values of the debentures on the dates of issuance after allocating a like
amount
of proceeds to the related warrants. The discount amounts are being amortized
as
charges to interest expense over the terms of the related debentures. The
total
unamortized amount of debt discounts at June 30, 2007 was $16,914.
Under
conditions similar to those included in the Amended Debenture (see discussion
below), the Company had the right to make any and all such principal and
interest 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. Through March 31, 2007, the Company issued 42,598,498 shares of its
common
stock in satisfaction of $1,500,000 in principal and $198,654 in accrued
interest. From April 1, 2007 through May 10, 2007, the Company issued an
additional 78,091,157 shares of its common stock in satisfaction of $1,849,343
in principal and $47,743 in accrued interest. The Company used cash to
pay
$29,836 in principal and $6,614 in interest on May 10, 2007.
Under
the
terms of the Secured Debenture Agreement, as amended, the Company has agreed
to
make weekly principal payments of at least $125,000 in satisfaction of
the
remaining principal commencing January 1, 2008, with interest on the outstanding
principal balance payable at the same time. However, in the event that
the
Company or Cornell Capital receives a legal opinion that Cornell Capital
is
eligible to sell shares of the Company’s common stock under Rule 144 of the
Securities Act of 1933, the Company will be required to resume making weekly
payments of principal and accrued interest with shares of its common stock
in
September 2007.
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.
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. The Company has the right to make any and all
principal
and interest 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 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 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”). 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 in November 2007.
The
face
amount of the Amended Debenture was recorded initially in the balance sheet
net
of unamortized debt discount of $319,000. During the quarter ended September
30,
2006, 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 March 31, 2007 reflected 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
unamortized debt discount amount at June 30, 2007 was $121,714.
The
Debenture was recorded in the accounts net of unamortized debt discount
reflecting the fair value on the date of issuance of the related the Warrant.
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
retirement of the Debenture, resulting in a loss on the extinguishment
of the
Debenture debt in the amount of $409,601 in June 2006.
Through
March 31, 2007, the Company issued 50,578,702 shares of its common stock
in
satisfaction of $2,500,000 in principal and $681,827 in accrued interest.
On May
10, 2007, the Company issued 4,510,933 shares of its common stock in
satisfaction of $70,822 in principal.
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 January
1,
2008 with interest on the outstanding principal balance payable at the
same
time. However, in the event that the Company or Cornell Capital receives
a legal
opinion that Cornell Capital is eligible to sell shares of the Company’s common
stock under Rule 144 of the Securities Act of 1933, the Company will be
required
to resume making weekly payments of principal and accrued interest with
shares
of its common stock in September 2007.
Availability
of Registered Shares
The
Company filed a registration statement on Form S-3 on October 12, 2006
covering
the resale of a total of 404,474,901 shares of the Company’s common stock by
various selling stockholders, including 55,089,635 shares that may be issued
to
Cornell Capital under the Amended Debenture, 120,689,655 shares related
to
convertible debentures issued under the Secured Debenture Agreement, and
38,750,000 shares related to the corresponding stock warrants. This registration
statement was declared effective by the SEC, enabling the Company’s use of
common stock to make installment payments to Cornell Capital under the
various
debentures. As of May 10, 2007, the Company has issued all of the approximately
175,779,000 shares covered by the registration statement relating to the
convertible debentures. At June 30, 2007, the total remaining principal
balance
payable to Cornell Capital under the convertible debentures and the total
amount
of related accrued interest were $16,199,650 and $428,789, respectively.
The
Debentures - Interest Expense
For
the
three months ended June 30, 2007 and 2006, the amounts of interest expense
related to the debentures issued to Cornell Capital, and included in the
accompanying condensed consolidated statements of operations based on the
stated
interest rates, were $321,196 and $289,829, respectively.
Interest
expense amounts included in the accompanying consolidated statements of
operations for the current and prior year periods also included total debt
discount amortization related to the debentures issued to Cornell Capital.
Such
amounts were $155,689 and $97,139, respectively, for the three months ended
June
30, 2007 and 2006.
The
discounts provided to Cornell Capital in connection with the issuance of
shares
of common stock in satisfaction of principal and interest payments due
under the
convertible debentures were charged to interest expense. Such interest
expense
was $131,551 for the three months ended June 30, 2007.
Notes
Payable to Cornell Capital
In
May
2007, the Company borrowed $1,100,000 from Cornell Capital under a one-year
promissory note that bears an annual interest rate of 12% for the first
six
months of its term and an annual rate of 15% thereafter. This promissory
note
and the accrued interest were repaid in July 2007. Interest expense was
$18,082
for the three months ended June 30, 2007.
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 consolidated statements of operations for the three months
ended
June 30, 2006 was $25,074.
Capital
Leases of Discontinued Operations
Mobilepro
Corp. remains the co-lessee on certain capital equipment leases of Kite
Networks
that were assumed by Gobility under the terms of the Gobility Agreement.
The
lease terms range from 24 to 36 months. The outstanding principal amounts
of the
capital leases are included in liabilities of companies held for sale at
June
30, 2007 and March 31, 2007 in the accompanying balance sheets. In the
event
that Kite Networks defaults on the leases, it is probable that the lessors
will
demand payment from Mobilepro Corp.
At
June
30, 2007, a summary of the future scheduled payments of the capital leases
was
as follows:
The
twelve months ending —
|
|
|
|
June
30, 2008
|
|
$
|
2,559,645
|
|
June
30, 2009
|
|
|
2,209,772
|
|
June
30, 2011
|
|
|
377,958
|
|
|
|
|
5,147,375 |
|
Less
- Interest portions
|
|
|
(628,226
|
)
|
Capital
leases - principal portions
|
|
$
|
4,519,149
|
|
Aggregate
lease proceeds in the amount of approximately $1,188,000 were used to purchase
certificates of deposit (including $126,000 in April 2007) that are pledged
to
secure the lease obligations; these amount are included in the balance
of assets
of companies held for sale in the condensed consolidated balance sheets
at June
30, 2007 and March 31, 2007.
NOTE
6-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.
The
discounts under this arrangement that were provided to Cornell Capital
upon
the sale of shares of common stock amounted to $137,795 in the three months
ended June 30, 2006, and were included in interest expense.
Common
Stock Transactions in the Three Months Ended June 30,
2007
In
the
three months ended June 30, 2007, the Company issued 82,602,090 shares
of its
common stock in satisfaction of $1,920,164 in principal and $47,743 in
accrued
interest owed to Cornell Capital pursuant to various debentures.
Common
Stock Transactions in the Three Months Ended June 30, 2006
During
the three months ended June 30, 2007, 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 3,413,367
shares
of common stock to the Company by Cornell Capital. The
return of the shares was recorded in October 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 an agreement with an investment banking firm.
Stock
Options and Warrants
The
stockholders of the Company have approved the issuance of 30,000,000 shares
of
common stock in connection with stock options granted pursuant to the 2001
Equity Performance Plan (the “2001 Plan”). In addition, the Company has issued
options and warrants to purchase common stock to key personnel pursuant
to
specific authorization of the board of directors outside the scope of the
2001
Plan. The following tables summarize the stock option activity and the
warrant
activity for the three months ended June 30, 2007:
|
|
|
|
Weighted-Average
|
|
Stock
Options —
|
|
Number
of Options
|
|
Exercise
Price
|
|
Outstanding
- March 31, 2007
|
|
|
3,877,000
|
|
$
|
0.2170
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
(133,334
|
)
|
$
|
0.2600
|
|
Outstanding
- June 30, 2007
|
|
|
3,743,666
|
|
$
|
0.2034
|
|
|
|
|
|
|
|
|
|
Exercisable
- June 30, 2007
|
|
|
2,475,306
|
|
$
|
0.2164
|
|
|
|
|
|
Weighted-Average
|
|
Stock
Warrants —
|
|
Number
of Warrants
|
|
Exercise
Price
|
|
Outstanding
- March 31, 2007
|
|
|
122,905,634
|
|
$
|
0.1597
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- June 30, 2007
|
|
|
122,905,634
|
|
$
|
0.1597
|
|
|
|
|
|
|
|
|
|
Exercisable
- June 30, 2007
|
|
|
111,987,242
|
|
$
|
0.1650
|
|
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. Certain portions of the stock options granted in
the
fiscal year ended March 31, 2006 were set to vest based on the achievement
of
individual and Company objectives during the year. Warrants to purchase
shares
of common stock vest over periods that range from eleven to thirty-three
months.
The vesting of warrants awarded to certain of the Company’s officers were set to
occur upon the achievement of individual and/or Company objectives. Warrants
typically expire on the ten-year anniversary of the date of grant.
Most
of
the stock options and warrants related to Company objectives were cancelled
at
March 31, 2007.
Effective
April 1, 2006, the Company adopted the provisions of SFAS 123R that require
companies to record the compensation cost associated with stock options
and
warrants. As required by SFAS 123R, the Company 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 since April 1, 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, the operating results for
the
prior-year periods were not restated. Compensation expense is being recorded
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. Such
expense
was $200,553 and $485,091 for the three months ended June 30, 2007 and
2006,
respectively.
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 grants during
the
three months ended June 30, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Dividend
yield
|
|
|
-
|
%
|
|
-
|
%
|
Expected
volatility
|
|
|
60
|
%
|
|
60
|
%
|
Risk-free
interest rate
|
|
|
4.00
|
%
|
|
4.00
|
%
|
Expected
term (in years)
|
|
|
10.00
|
|
|
10.00
|
|
NOTE
7-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 year. 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 Debenture and other convertible notes payable for the
three-month periods ended June 30, 2007 and 2006 were anti-dilutive as
the
Company incurred net losses in these periods.
NOTE
8-LITIGATION
During
the three months ended June 30, 2007, the Company was party to the following
material legal proceedings.
1)
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 infringements. Davel does not believe that
the
allegations set forth in the complaint are valid and Davel filed a Motion
for
Summary Judgment, which remains pending before the court. 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.
2)
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
makes
claims arising out of the acquisition by the Company of Transcordia, LLC.
The
plaintiff alleges 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. The motion to dismiss was subsequently
denied
by the Court and the matter is in the discovery stage. The Company believes
that
it has meritorious defenses to the alleged claims and intends to vigorously
defend itself in this matter. Notwithstanding the foregoing, in the event
that
its defenses were not successful, the Company believes that any potential
exposure related to the claims alleged against the Company is not likely
to be
material.
3)
On
April 17, 2007, the Supreme Court of the United States issued an opinion
in the
case captioned Global Crossing Telecommunications, Inc. v. Metrophones
Telecommunications, Inc. on Certiorari from the United States Court of
Appeals
for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"),
No.
05-705, in which it upheld the Ninth Circuit's decision that independent
payphone providers have a private right of action to pursue recovery in
federal
court from telecommunication carriers who fail to pay dial around compensation.
The ruling in the Metrophones Case permits litigation to resume that has
been
pending in federal district court against AT&T Corporation, Sprint
Communications Company, LP and Qwest Communications, Inc. (the "Defendants")
for
non-payment of dial around compensation. Davel Communications, Inc. and
certain
of Davel's subsidiaries (collectively, the "Davel Entities") are directly
or
indirectly plaintiffs in the federal district court cases against the
Defendants. Although the federal district court case has been pending since
1999, the litigation remains in its preliminary phases. As a result, the
Company
cannot predict the likelihood of success on the merits, the costs associated
with the pursuit of the claims, the timing of any recovery or the amount
of
recovery, if any. However, the industry representing a group of independent
payphone providers, including the Davel Entities, has recently prevailed
in a
similar Federal Communications Commission administrative proceeding against
another carrier for non-payment of dial-around compensation using a similar
damages model which was accepted and pursuant to which the Federal
Communications Commission assessed pre-judgment interest (the "Similar
Litigation"). The Similar Litigation is being appealed to the U.S. Court
of
Appeals for the District of Columbia. Based upon our damages model in the
Similar Litigation, we estimate that the amount in controversy for the
Davel
Entities against the Defendants extends well into the eight figures, but
any
recovery is conditioned on, among other things (i) prevailing on the merits
at
trial; (ii) having the Davel Entities' damages model and other claims approved
in whole or in large part; and (iii) prevailing on any appeals that the
Defendants may make. As evidenced by the eight years that this litigation
has
been in process, the Defendants have shown an interest in stretching the
duration of the litigation and have the means to do so. Although the Davel
Entities could ultimately benefit (in an absolute sense, although not
necessarily on a present value basis) from this delay in the event that
pre-and/or post-judgment interest (awarded at 11.25% per annum in the Similar
Litigation) is assessed against the Defendants and the potential award
of
attorneys' fees and/or other remedies (in addition to compensatory damages)
if
the Davel Entities prevail, such delay will result in a deferral of the
receipt
of any cash to the Davel Entities.
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 June 30, 2007 and 2006, our financial condition
at
June 30, 2007 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.
Background
Beginning
in early calendar year 2004, we built a broadband wireless, telecommunications,
and integrated data communication services company that, at June 30, 2007,
delivered 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.
At
June
30, 2007, we marketed and sold our integrated communications services through
nine branch offices in seven states and we serviced over 123,000 billed accounts
representing over 211,000 equivalent subscriber lines including approximately
110,000 local and long-distance telephone lines, approximately 38,000 dial-up
lines, approximately 5,000 DSL lines, approximately 25,000 fixed and mobile
wireless lines, approximately 6,000 cellular lines and the remaining are
other
Internet-related accounts. We own and operate approximately 22,200 payphones
located predominantly in 44 states and the District of Columbia. Most of
our
subscribers are residential customers.
Historically,
our revenues have been generated through three of our four business
reporting segments:
Wireless
Networks
|
|
Our
broadband wireless network deployment efforts have been conducted
by our
wholly owned subsidiary, NeoReach, Inc., (“NeoReach”), and its subsidiary,
Kite Networks, Inc. (“Kite Networks,” formerly, NeoReach Wireless, Inc.).
This segment has also included the operations of Kite Broadband,
LLC
(“Kite Broadband”), a wireless broadband Internet service provider located
in Ridgeland, Mississippi.
|
|
|
|
Voice Services
|
|
Our
voice services segment has been 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 Overland Park, Kansas; and Davel Communications, Inc. (“Davel”), an
independent payphone provider based in Cleveland, Ohio. CloseCall
offers
its 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 included 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 many 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.
This
segment also includes our Internet gaming subsidiary, ProGames
Network,
Inc. (“ProGames”) that we founded in December
2005.
|
Prior
to
January 2004, we were a development stage company. Although we were incorporated
approximately seven 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
again
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 completed twenty-two
(22) acquisitions during this period.
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
became a wholly owned subsidiary of Mobilepro.
DFW
has
been the principal operating subsidiary within our Internet services division.
On January 20, 2004, we acquired DFW. From that time, we acquired nine
additional Internet service businesses that have operated 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. 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 an initial 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, Inc. with and into NeoReach Wireless,
Inc.
and changed the name of the combined entity to Kite Networks, Inc. (“Kite
Networks”).
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-K, quarterly
reports on 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.
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 13,800 or 62.2%, of
the
payphones are located in warm climate states of the southwest, southeast
and
west; 8,400 or 37.8% of the payphones are located in midwest, northwest,
and
northeast sections of the country, with usage during the winter months thereby
negatively affected by the cold climate. The Internet services business provides
service to customers that are primarily located in the states of Texas, Arizona,
Louisiana, Kansas, Missouri, Wisconsin, Ohio, Washington and
California.
Current
Business Conditions
Our
acquisition strategy of the last four years was executed with one primary
objective being the establishment of 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 several other cities for the
deployment, ownership, and management of such networks and have substantially
completed city-wide wireless networks deployments in Farmers’ Branch, Texas, and
Longmont, Colorado
However,
most of our acquired businesses experienced declining revenues. Although
restructuring measures helped to control other operating expenses, we have
been
unable to reduce the corresponding costs of services sufficiently to maintain
profitability. In addition, we have funded the start-up and operations of
the
municipal wireless networks and online gaming businesses without these companies
achieving expected revenues.
As
a
result, our business has historically lost money. Our accumulated deficit
at
June 30, 2007 was $82,259,910. In the quarter ended June 30, 2007, we sustained
a net loss of $4,988,665. In the fiscal years ended March 31, 2007, 2006
and
2005, we sustained net losses of $45,898,288, $10,176,407 and $5,359,722,
respectively. As a result, the amounts of cash used in operations during
the
fiscal quarter ended June 30, 2007 and the fiscal year ended March 31, 2007
were
$1,111,698 and $6,558,708, respectively. Future losses are likely to occur.
Accordingly, we are likely to continue to experience liquidity and cash flow
problems if we are unable to improve the Company’s operating performance, to
raise additional capital as needed and on acceptable terms, or to sell assets
for cash.
The
ramp-up time from selection to the completion of a municipal wireless network
deployment can be protracted. As a result, we incur significant costs related
to
each deployment before any significant revenues are expected. Generally,
the
addition of wireless network subscribers has occurred more slowly than expected.
As a result, we have realized that it may take up to 2 years or more for
deployed networks to achieve positive cash flows. There can be no assurance
that
any deployment will achieve positive cash flow. Although this business
contributed revenues of $133,318 in the current quarter (revenues were
insignificant in the prior year), operating costs for Kite Networks were
approximately $1,274,000 in the quarter ended June 30, 2007 before depreciation
expense. The capital equipment costs for the completed networks in Tempe,
Arizona; Farmers’ Branch, Texas; Longmont, Colorado, and other scheduled
deployments have approximated $13.0 million. To date, the cash needs of this
business have been substantially funded through borrowings by Mobilepro Corp.
from Cornell Capital under a variety of debt instruments and over $5 million
in
equipment lease financing. Kite Networks has also been provided extended
payment
terms by certain significant equipment suppliers. However, we realized that
sufficient funds will not be available from these existing sources for Kite
Networks to effectively continue the execution of its current business plan.
As
a result, we commenced the search for capital as described below during the
fourth quarter of the fiscal year 2007.
The
business of Kite Broadband is experiencing declining revenues. Revenues for
the
most recent quarter were approximately $2,573,000 representing a 24.0% decline
over the last 21 months. Costs of sales consist substantially of payments
due
Sprint for network services, which costs are mostly fixed. Although a
substantial portion of the management cost of this business is now borne
by Kite
Networks, the declining revenues and the fixed costs of the services provided
by
Sprint have adversely affected the cash flows of this business.
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the wireless networks business conducted by its
Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
wireless networks business to Gobility, Inc. (“Gobility”) on July 8, 2007. The
purchase price was $2.0 million, paid with a debenture convertible into shares
of common stock of Gobility. However, under the terms of the debenture, Gobility
is required to raise at least $3.0 million in cash no later than August 15,
2007. If Gobility defaults on the financing obligation under the debenture,
we
will have the right but not the obligation to repurchase the wireless networks
business with the surrender of the debenture and the payment of a nominal
additional amount.
Many
of
the other companies that we have acquired have also experienced declining
revenues. For example, 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 $4,220,433 for the three
months ended June 30, 2006, to approximately $3,193,000 for the three months
ended June 30, 2007, a decline of approximately 24.3%. 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 June
30,
2007 were approximately $5,968,000 compared with revenues of approximately
$8,197,000 for the corresponding quarter of the prior year, a decline of
27.2%.
The
declining revenues of these businesses, without proportional decreases in
the
costs of such services, and the operating costs of Kite Networks are the
major
causes of our operating losses and unfavorable cash flows from operations.
As a
result and as discussed above, we are engaged in various stages of negotiation
with parties who have expressed interest in acquiring certain other portions
of
our business.
During
the fourth quarter of the prior year, we also engaged in extensive negotiations
with a company that intended to purchase Davel, the Company’s payphone operator.
The negotiations did not result in a transaction. As a result, the losses
incurred by Davel continue to adversely affect our consolidated operating
results. However, in June 2007, we completed the sale of approximately 730
operating payphones to an unaffiliated payphone operator and received over
$200,000 in cash proceeds. Currently, we are engaged in negotiations for
the
sale of additional operational payphones.
In
March
2007, we announced that we had signed a definitive agreement for the merger
of
ProGames, our online gaming subsidiary, with and into Winning Edge
International, Inc. Consummation of the transaction was subject to a number
of
closing conditions including the arrangement of financing that would have
sustained the operations of the combined entity. Financing has not been
arranged. As a result, the merger agreement was terminated and we continue
to
fund the operating costs of ProGames.
To
date,
Cornell Capital Partners, L.P. (“Cornell Capital”) has been a significant source
of capital for us, providing financing in several forms. During fiscal 2007,
we
borrowed funds under a series of convertible debentures. The total amount
owed
to Cornell Capital under the debentures at March 31, 2007 was $18,149,650.
In
May 2007, we borrowed $1,100,000 from Cornell Capital under a promissory
note in
order to help bridge our cash flow shortfall during the first quarter. This
promissory note and accrued interest were repaid in July 2007. Using shares
of
our common stock registered on Form S-3 in November 2006, we made principal
and
interest payments on the debentures that totaled $4,880,489 during the fiscal
year ended March 31, 2007, and that totaled $1,967,908 from April 2007 through
May 2007. However, the supply of registered shares available for the conversion
of the debentures has been exhausted. Cornell Capital has agreed to delay
additional installment payments until January 2008 when we will be obligated
to
resume making total weekly principal payments of $375,000 plus accrued interest.
Unless additional shares are registered by the Company under the Securities
Act
of 1933 (the “Securities Act”), shares acquired by Cornell Capital are tradable
under Rule 144 of the Securities Act, or shares of our common stock are
otherwise freely tradable by Cornell Capital without restriction, we will
be
required to make these payments in cash. However, in the event that the Company
or Cornell Capital receives a legal opinion that Cornell Capital is eligible
to
sell shares of the Company’s common stock under Rule 144, the Company will be
required to resume making weekly payments of principal and accrued interest
with
shares of its common stock in September 2007.
Strategic
Direction
In
April
2007, we announced that our Board of Directors had decided to explore potential
strategic alternatives for the entire Company, and that it had received
inquiries from potential buyers regarding the purchase of portions of its
business. This initiative was undertaken with the goals of maximizing the
value
of our assets, returning value to our stockholders and eliminating the Company’s
debt, particularly amounts owed to Cornell Capital which exceeded $17.7 million
at June 30, 2007.
We
received letters of interest regarding the acquisition of the CloseCall,
AFN and
the Internet service provider businesses (the “Wireline Businesses”) and several
potential purchasers conducted due diligence activities. This process resulted
in the execution of an agreement to sell the Wireline Businesses to United
Systems Access, Inc. (“USA”) on June 30, 2007 (the “USA Purchase Agreement”).
Pursuant to the USA Purchase Agreement, we closed the sale of the Internet
service provider companies to USA on July 18, 2007, and received cash proceeds
of $2,500,000, a promissory note for $2,000,000 and preferred stock of USA
convertible into 7.5% of the fully diluted shares of USA’s common stock valued
at $8.1 million. Simultaneously, we used $2,000,000 of this cash to pay down
principal and accrued interest owed to Cornell Capital under the promissory
note
and debentures.
The
sale
of CloseCall and AFN requires the receipt of certain state regulatory approvals
before it can be completed. The receipt of all of the approvals may not occur
until the end of calendar 2007. In the meantime and pursuant to a management
agreement that was signed in July 2007 (the “USA Management Agreement”), USA
shall operate the businesses, retain any cash provided by the operations
of
these companies and fund any cash requirements of the companies until the
sale
of these companies is completed. In addition, USA shall reimburse us for
the
amount of interest expense that accrues during the term of the USA Management
Agreement related to the Cornell Capital debentures.
Upon
the
close and pursuant to the terms of the USA Purchase Agreement, we shall receive
additional cash proceeds of $19.4 million, including payment of the $2.0
million
promissory note. Using cash proceeds from the sale of the remainder of the
Wireline Business, we expect to be in a position to retire the Cornell Capital
debentures plus accrued interest.
If
the
sale of the Wireline Businesses is not completed in accordance with the
negotiated terms, the Company will not have the ability to continue as a
going
concern beyond the third quarter of the current fiscal year without a
significant restructuring of the Cornell Capital debt.
Discontinued
Operations
In
connection with the activities summarized above, we have reclassified the
assets
and liabilities of the Wireline Business and the wireless networks business
as
assets and liabilities related to companies held for sale in the consolidated
condensed balance sheets at June 30, 2007 and March 31, 2007. In addition,
we
have classified the results of operations of these companies in discontinued
operations in the consolidated condensed statements of operations for the
three
months ended June 30, 2007 and 2006.
Critical
Accounting Policies
We
consider the accounting policies related to the disposal of long-lives assets,
discontinued operations, the valuation of goodwill and other intangible assets,
transactions related to our debt and equity financing activity, and revenue
and
related cost recognition 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.
Results
of Operations and Financial Condition
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 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
EBITDA, but emphasize the change of net income/(loss) per share.
The
Three Months Ended June 30, 2007 and 2006
Consolidated
revenues of continuing operations (representing the revenues of Davel and
ProGames) for the quarter ended June 30, 2007 were $5,967,820 compared with
revenues of $8,197,498 in the prior year quarter, a decrease of 27.2%. Davel
derives most of its operating revenues from coin revenue and “dial-around”
revenues (intercarrier compensation paid to us by the providers of 800 and
other
toll-free numbers at the rate of 49.4 cents per call) that are generated
by our
communications services.
The
proliferation of cell phone use by consumers has caused a continuous reduction
in the use of payphones. As a result, the revenues of Davel continue to decline.
In addition, the location of a significant number of payphones in areas of
the
country that are subject to severe winter weather contributes to the seasonality
of this business. In order to attempt to maintain operating margins, 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 24,911 payphones in operation during the
quarter ended June 30, 2007, compared with an average of 34,208 payphones
in
operation during the quarter ended June 30, 2006, a decline of approximately
27.2%. Nonetheless, the cost of services for Davel (excluding depreciation
and
amortization) for the quarter ended June 30, 2007, expressed as a percentage
of
corresponding revenues, was 59.7% compared with a percentage of 58.2% in
the
first quarter of the prior fiscal year. The average monthly revenues per
average
payphone for the fiscal quarters ended June 30, 2007 and 2006 were $76.76
and
$78.44, respectively, representing a decline of 2.1% between years.
The
total
operating costs and expenses of continuing operations for the quarter ended
June
30, 2007, excluding the cost of services, depreciation and amortization,
were
$4,328,302, representing approximately 72.3% of consolidated revenues for
the
current quarter. Comparable operating costs and expenses of continuing
operations for the quarter ended June 30, 2006, were $5,096,944, or 62.2%
of
consolidated revenues for the corresponding period. Included in the operating
costs and expenses for each quarter were stock compensation expense amounts
(recorded pursuant to the requirements of FAS 123R) of $200,553 and $485,091,
respectively. Such costs for the prior year quarter also included a charge
related to the write-off of investment banking fees of approximately $166,000.
Depreciation and amortization expenses were $717,181 and $760,737 in the
quarters ended June 30, 2007 and 2006, respectively, representing primarily
the
depreciation of the costs of deployed payphones and the amortization of payphone
location contracts. The operating costs and expenses of ProGames for the
three months ended June 30, 2007 and 2006 were approximately $207,000 and
$88,000, respectively.
Interest
and other expense, net, was $630,725 for the quarter ended June 30, 2007
compared with $503,651 in the corresponding quarter of the prior fiscal year.
During the current quarter, we retired principal owed under the Cornell Capital
debentures in the amount of $1,950,000. However, in May 2007, we borrowed
$1,100,000 from Cornell Capital pursuant to a promissory note bearing an
annual
interest rate of 12%. During the prior year quarter, we completed the retirement
of notes payable to Cornell Capital. The major components of net interest
and
other expense for quarters ended June 30, 2007 and 2006 are presented in
the
following schedule.
Type
of Debt
|
|
2007
|
|
2006
|
|
Convertible
debentures (at stated rates)
|
|
$
|
321,196
|
|
$
|
289,829
|
|
Convertible
debentures (debt discount amortization)
|
|
|
155,689
|
|
|
97,139
|
|
Convertible
debentures (stock issuance discounts)
|
|
|
131,551
|
|
|
-
|
|
SEDA
draw discounts
|
|
|
-
|
|
|
137,795
|
|
Notes
payable to Cornell Capital
|
|
|
18,082
|
|
|
25,074
|
|
Other,
net
|
|
|
4,207
|
|
|
(46,186
|
)
|
Interest
and Other Expense, net
|
|
$
|
630,725
|
|
$
|
503,651
|
|
The
losses from continuing operations for the three months ended June 30, 2007
and
2006 were $3,273,174 and $3,625,783, respectively. The prior year quarter
amount
included a loss incurred on the extinguishment of debt in the amount of
$409,601.
The
losses from discontinued operations for the three months ended June 30, 2007
and
2006 were $1,715,491 and $1,111,724, respectively. The prior year quarter
results included a charge for goodwill impairment of $348,118.
We
reported a net loss of $4,988,665 for the quarter ended June 30, 2007, or
$0.0066 per share, compared with a net loss of $4,737,507 for the quarter
ended
June 30, 2006, or $0.0082 per share. Corporate expenses were $1,767,995 in
the
current quarter, including $658,673 in net interest and other expenses and
$207,275 in ProGames operating expenses. Corporate expenses were $2,559,159
in
the prior year quarter, including $540,643 in net interest and other expenses,
$281,635 of restructuring charges, the loss on the debt extinguishment in
the
amount of $409,601, the write-off of $166,000 in previously deferred investment
banking fees and $88,000 of ProGames organizational costs.
Liquidity
and Capital Resources
We
have
forecasted our operating cash requirements through the end of calendar 2007
based on several important assumptions. We have not forecasted the use of
cash
that would be required to repay the transferred liabilities of the wireless
networks business in the event that Gobility fails to raise sufficient capital.
Mobilepro Corp. is co-obligor on the capital leases transferred to Gobility.
The
total principal balance of these leases was approximately $4,519,000 at June
30,
2007. Monthly lease payments on these capital leases total approximately
$213,000. In addition, Mobilepro Corp. was a co-purchaser of certain wireless
network equipment obtained by Kite Networks. The amount owed to the supplier
of
this equipment for the purchase of this equipment, and included in the accounts
payable of Kite Networks at June 30, 2007, approximates $1,591,000.
We
have
also assumed additional sales of operational payphones and the reduction
of
corresponding Davel operating costs such that additional funding of this
business by Mobilepro Corp. would not be required.
If
the
Company fails to eliminate the cash requirements represented by the wireless
network business, Davel and ProGames as planned, the Company’s will not have
sufficient cash to sustain operations until the completion of the Wireline
Business sale without raising additional capital.
During
the quarter ended June 30, 2007, the balance of unrestricted cash and cash
equivalents relating to continuing operations decreased by $246,871 to
$1,746,910. The decrease in the current quarter relating to discontinued
operations was $341,109.
Net
cash
used in operations during the quarter ended June 30, 2007 was $1,111,698,
reflecting the funding of operating expenses incurred by Davel and the corporate
segment and including $143,700 used in the operating activities of discontinued
operations. There were reductions in the accounts receivable and the accounts
payable and accrued liabilities of continuing operations in the amounts of
$539,627 and $493,822, respectively.
We
used
net cash of $2,851 in connection with investing activities during the current
quarter, reflecting $87,013 related to the investing activities of discontinued
operations. We made capital expenditures during the current quarter relating
to
continuing operations in the approximate amount of $183,000. Offsetting this
amount was over $200,000 in cash proceeds related to the sale of payphones
in
the current quarter.
Our
financing activities during the current quarter provided net cash of $526,569.
Cash provided to us by Cornell Capital pursuant to a promissory note issued
by
us in May 2007 was $1,100,000. We used $29,836 in cash to retire principal
amounts owed to Cornell Capital under the debentures. The financing activities
of discontinued operations used $543,595 in 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. At the time, we believed
that less expensive financing alternatives would be available to us. However,
the successful pursuit of alternative sources of capital was very difficult.
Our
group of businesses, our history of net losses, our lack of a sufficient
corporate credit history with significant suppliers and the uncertain payback
associated with investments in municipal wireless networks proved to be
significant obstacles to overcome in our search for capital.
Despite
the expiration of the SEDA, Cornell Capital has continued to support the
Company. On June 30, 2006, we issued an amended 7.75% secured convertible
debenture in the amount of $15,149,650 to 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. With the issuance of the Amended
Debenture, we deferred a cash requirement of $4,500,000 (the amount of the
originally 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
that provided $7.0 million in funding with the proceeds received upon the
issuance of a series of secured, convertible debentures. At each closing,
the
Company issued Cornell Capital a 7.75% secured convertible debenture in the
principal amount for that closing, convertible into common stock at $0.174
per
share and paid a transaction fee equal to 7% of the proceeds. On August 30,
2006, the first closing provided gross cash proceeds of $2,300,000. During
the
quarter ended December 31, 2006, additional gross cash proceeds of $3,525,000
were received. Pursuant to the final closing under this agreement, we received
gross proceeds of $1,175,000 on February 1, 2007.
Using
shares of our common stock registered on Form S-3 in November 2006 and as
permitted by the terms of the debentures, the Company made principal and
interest payments on the debentures issued to Cornell Capital that totaled
$4,880,489 during the fiscal year ended March 31, 2007, and that totaled
$1,967,908 from April 2007 through May 2007. However, the supply of shares
registered and related to the convertible debentures has been exhausted.
Cornell
Capital has agreed to delay additional installment payments until early January
2008 when the Company will be obligated to make total weekly principal payments
of $375,000 plus accrued interest. Unless additional shares are registered
by
the Company under the Securities Act of 1933 (the “Securities Act”), shares
acquired by Cornell Capital are tradable under Rule 144 of the Securities
Act,
or shares of the Company’s common stock are otherwise freely tradable by Cornell
Capital without restriction, the Company will be required to make these payments
in cash. However, in the event that the Company or Cornell Capital receives
a
legal opinion that Cornell Capital is eligible to sell shares of the Company’s
common stock under Rule 144, the Company will be required to resume making
weekly payments of principal and accrued interest with shares of its common
stock in September 2007.
During
the prior year, we were successful in obtaining lease financing covering
certain
municipal wireless network equipment. On
June
28, 2006, the Company executed a master equipment lease agreement intended
to
provide financing for the acquisition of qualifying municipal wireless network
equipment. On June 30, 2006, the Company received $2,000,000 in gross cash
proceeds from the sale of certain municipal wireless network equipment that
is
deployed in Tempe, Arizona, and is leasing back the equipment pursuant to
the
master lease agreement. The
leaseback period is 36 months and the terms include 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.
On
December 26, 2006, we completed the receipt of approximately $1,207,000 in
gross
cash proceeds from the sale of certain wireless network equipment deployed
in
Farmers’ Branch, Texas, and commenced a leaseback of the equipment under the
master lease agreement. As above, the leaseback period is thirty-six months
and
the terms include a fair-market-value purchase option at the end of the lease
term. The Company was required to purchase certificates of deposit totaling
approximately $362,000 in order to collateralize this transaction.
On
October 10, 2006, the Company 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 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 50% of the cost of such
purchases. The lease term for each equipment purchase is 24 months. Pursuant
to
this arrangement and since December 2006, the Company has recorded capital
lease
transactions covering equipment with a total cost of approximately
$1,950,000.
Currently,
our major challenge is to assure the funding of current operations during
the
next two quarters. As discussed above, if we obtain the necessary regulatory
approvals, we expect to complete the sale of the Wireline Business by the
end of
calendar year 2007 providing us with sufficient cash to retire the Cornell
Capital debentures and related accrued interest.
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.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
Our
exposure to market risk for changes in interest rates relates primarily to
our
purchase of certificates of deposit to secure letters of credit and capital
leases. In addition, we own common stock issued by two companies, one of
which
is a publicly-traded security. The carrying value of these investments
approximated $443,000 at June 30, 2007. The difference between the total
carrying value of these investments and the current market value of the publicly
traded securities was not material. Further, we do not use derivative financial
instruments in our investments. Accordingly, we do not believe that there
is any
material market risk exposure with respect to derivative or other financial
instruments that would require disclosure in this item.
Item
4. Controls and Procedures.
Evaluation
of Disclosure 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. Our quarterly evaluation
of
disclosure controls includes an evaluation of some components of our internal
control over financial reporting, and internal control over financial reporting
is also separately evaluated on an annual basis for purposes of providing
the
management report, which is set forth below.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding
the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reposting includes
those
policies and procedures that (i) pertain to the maintenance of records that
in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with authorizations of management and directors
of the
company; and (iii) provide reasonable assurance regarding prevention of timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Management
assessed our internal control over financial reporting as of March 31, 2007,
the
end of our most recently completed fiscal year. Management based its assessment
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management’s
assessment included evaluation of elements such as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. This assessment
was
supported by testing and monitoring performed by both our outsourced internal
auditing firm and certain of our own finance and accounting
personnel.
Based
on
our assessment, management concluded that our internal control over financial
reporting was ineffective as of the end of the fiscal year to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with
U.S.
generally accepted accounting principles except as described below. We reviewed
the results of management’s assessment with the Audit Committee of our Board of
Directors. In addition, on a quarterly basis we will evaluate any changes
to our
internal control over financial reporting to determine if material change
has
occurred.
Our
independent registered public accounting firm, Bagell, Josephs, Levine &
Company L.L.C. (“Bagell”), audited management’s assessment and independently
assessed the effectiveness of the company’s internal control over financial
reporting and issued an attestation report concurring with management’s
assessment, which was included in Part II, Item 8, of our Annual Report on
Form
10-K for the fiscal year ended March 31, 2007.
Material
Weaknesses in Internal Controls
Bagell
provided us with an unqualified report on our consolidated financial statements
for the fiscal year ended March 31, 2007. However, during the conduct of
our
assessment of internal control over financial reporting, we identified material
weaknesses in the design of certain general controls governing computer
processing activities and have advised the audit committee that the following
material weaknesses existed at March 31, 2007. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 2, a material weakness is
a
significant control deficiency or a combination of significant deficiencies
that
results in a more than remote likelihood that a material misstatement of
the
annual or interim financial statements will not be prevented or
detected.
The
material weaknesses exist in the design and execution of certain general
controls governing computer processing (“I/T”) activities.
Most
significantly, the management of the customer information database utilized
by
the customer care and customer billing functions of one of our companies
is
performed offsite by a subcontracted consultant without proper controls over
access to the data or changes to the system. In addition, we do not have
processes established to document the control over changes made to certain
proprietary information systems that supply transactions amounts. Finally,
we do
not have the proper processes in place at all subsidiaries for the establishment
and maintenance of individual access codes and passwords.
While
these material weaknesses did not have an effect on our reported results
or
result in the restatement of any previously issued financial statements or
any
other related disclosure, they nevertheless constituted deficiencies in our
controls. In light of these material weaknesses and the requirements enacted
by
the Sarbanes-Oxley Act of 2002, and the related rules and regulations adopted
by
the SEC, our CEO and CAO concluded that, as of March 31, 2007, our controls
and
procedures needed improvement and were not effective at a reasonable assurance
level. Despite those deficiencies in our internal controls, management believes
that there were no material inaccuracies or omissions of material fact in
this
quarterly report.
Since
the
discovery of the material weaknesses in I/T internal controls described above,
management is strengthening the Company's oversight over the I/T functions
and
its attendant controls, procedures, documentation and security beyond what
has
existed in prior years. Specifically, we have taken, and plan to take, whatever
additional steps necessary to improve our I/T controls and procedures and
eliminate the identified material weaknesses. Management has prepared for
publication within the Company a set of information security program standards
that shall provide requirements to the I/T staff members throughout the Company
in a wide range of I/T areas including IT governance, computer operations,
system changes and information security.
The
elimination of the material weaknesses identified above is among our highest
priorities. We have discussed our corrective actions and future plans with
our
audit committee and Bagell as of the date of this annual report, and believe
the
planned actions should serve to correct the above listed material weaknesses
to
our internal controls. However, we cannot provide assurance that neither
we nor
our independent auditors will in the future identify further material weaknesses
or significant deficiencies in our internal control over financial reporting
that we have not discovered to date.
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the CEO and CAO, does not expect that our
disclosure controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how
well
designed and operated, can provide only reasonable, not absolute, assurance
that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will
not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by
the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls
is
based in part on certain assumptions about the likelihood of future events,
and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation
of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions of deterioration
in the degree of compliance with policies or procedures.
Changes
in Internal Control over Financial Reporting
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
operating results, we were involved with the following legal proceedings
during
the fiscal quarter ended June 30, 2007.
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 infringements. 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. The plaintiff
is
seeking monetary relief of at least $7,500,000. Davel does not
believe
that the allegations set forth in the complaint are valid and Davel
filed
a Motion for Summary Judgment, which remains pending before the
court. In
a similar action filed by the plaintiff in the United States District
Court of Texas against Southwestern Bell Telephone, LP and SWBT
Texas, LLC
the Court recently granted the defendants’ Motion for Summary Judgment and
dismissed the case with prejudice based upon that court’s finding that the
Gammino Patents were invalid. The decision of the United States
District
Court of Texas has been appealed.
|
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
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
makes claims arising out of the acquisition by the Company of Transcordia,
LLC. The plaintiff alleges 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. The motion to
dismiss
was subsequently denied by the Court and the matter is in the discovery
stage. We believe that we have meritorious defenses to the alleged
claims
and intend to vigorously defend ourselves in this matter. In the
event
that our defenses were not successful, we believe that any potential
exposure related to the claims alleged against the Company is not
likely
to be material.
|
3) |
On
April 17, 2007, the Supreme Court of the United States issued an
opinion
in the case captioned Global Crossing Telecommunications, Inc.
v.
Metrophones Telecommunications, Inc. on Certiorari from the United
States
Court of Appeals for the Ninth Circuit (the "Ninth Circuit" and
the
"Metrophones Case"), No. 05-705, in which it upheld the Ninth Circuit's
decision that independent payphone providers have a private right
of
action to pursue recovery in federal court from telecommunication
carriers
who fail to pay dial around compensation. The ruling in the Metrophones
Case permits litigation to resume that has been pending in federal
district court against AT&T Corporation, Sprint Communications
Company, LP and Qwest Communications, Inc. (the "Defendants") for
non-payment of dial around compensation. Davel Communications,
Inc. and
certain of Davel's subsidiaries (collectively, the "Davel Entities")
are
directly or indirectly plaintiffs in the federal district court
cases
against the Defendants. Although the federal district court case
has been
pending since 1999, the litigation remains in its preliminary phases.
As a
result, we cannot predict the likelihood of success on the merits,
the
costs associated with the pursuit of the claims, the timing of
any
recovery or the amount of recovery, if any. However, the industry
representing a group of independent payphone providers, including
the
Davel Entities, has recently prevailed in a similar Federal Communications
Commission administrative proceeding against another carrier for
non-payment of dial-around compensation using a similar damages
model
which was accepted and pursuant to which the Federal Communications
Commission assessed pre-judgment interest (the "Similar Litigation").
The
Similar Litigation is being appealed to the U.S. Court of Appeals
for the
District of Columbia. Based upon our damages model in the Similar
Litigation, we estimate that the amount in controversy for the
Davel
Entities against the Defendants extends well into the eight figures,
but
any recovery is conditioned on, among other things (i) prevailing
on the
merits at trial; (ii) having the Davel Entities' damages model
and other
claims approved in whole or in large part; and (iii) prevailing
on any
appeals that the Defendants may make. As evidenced by the eight
years that
this litigation has been in process, the Defendants have shown
an interest
in stretching the duration of the litigation and have the means
to do so.
Although the Davel Entities could ultimately benefit (in an absolute
sense, although not necessarily on a present value basis) from
this delay
in the event that pre-and/or post-judgment interest (awarded at
11.25% per
annum in the Similar Litigation) is assessed against the Defendants
and
the potential award of attorneys' fees and/or other remedies (in
addition
to compensatory damages) if the Davel Entities prevail, such delay
will
result in a deferral of the receipt of any cash to the Davel Entities.
|
Item
1A. Risks Factors
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 those included in our Annual Report on Form 10-K for the fiscal
year
ended March 31, 2007, and the other information contained in this report.
Our
future results may also be impacted by other risk factors listed from time
to
time in our future filings with the SEC, including, but not limited to, our
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
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.
The
Sale of Portions of Our Business May Not Be Concluded and We May Not Have
Sufficient Cash to Continue Operations
We
have
forecasted our operating cash requirements through the end of calendar 2007
based on several important assumptions. We have assumed that Gobility will
succeed in obtaining sufficient funding for its operations enabling Kite
Networks to make the scheduled payments on its liabilities including the
capital
equipment leases.
We
have
also assumed additional sales of operational payphones and the reduction
of
corresponding Davel operating costs such that additional funding of this
business by Mobilepro Corp. would not be required.
If
the
Company fails to permanently eliminate the cash requirements represented
by the
wireless network business and Davel as planned, the Company’s will not have
sufficient cash to sustain operations until the completion of the Wireline
Business sale without raising additional capital.
Included
in its audit report on our consolidated financial statements included in
our
Annual Report on Form 10-K for the fiscal year ended March 31, 2007, our
independent registered public accounting firm included a paragraph describing
that there is substantial doubt about the Company’s ability to continue as a
going concern.
The
Failure of Gobility to Raise Capital May Result in Our Payment of Transferred
Liabilities
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the wireless networks business conducted by its
Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
wireless networks business to Gobility on July 8, 2007. The purchase price
was
$2.0 million, paid with a debenture convertible into shares of common stock
of
Gobility. However, under the terms of the debenture, Gobility is required
to
raise at least $3.0 million in cash no later than August 15, 2007. If Gobility
defaults on the financing obligation under the debenture, we will have the
right
to repurchase the wireless networks business with the surrender of the debenture
and the payment of a nominal additional amount.
Mobilepro
Corp. is co-obligor on the capital leases transferred to Gobility. The total
principal balance of these leases was approximately $4,519,000 at June 30,
2007.
Monthly lease payments on these capital leases total approximately $213,000.
In
addition, Mobilepro Corp. was a co-purchaser of certain wireless network
equipment obtained by Kite Networks. The amount owed to the supplier of this
equipment for the purchase of this equipment, and included in the accounts
payable of Kite Networks at June 30, 2007, approximates $1,591,000.
Although
Gobility has represented to us that it has identified $8 million of potential
funding, we understand that Gobility has not yet closed on any funding and
that
it is behind in making scheduled lease payments. If Gobility fails to raise
capital and make the required payments on the liabilities described above,
it is
likely that the creditors described above will demand payment from Mobilepro
Corp. and they may find Mobilepro Corp. to be in default on these obligations.
Failure
to Complete the Sale of the Wireline Businesses to USA Will Result in Our
Inability to Retire the Cornell Capital Debentures
On
June
30, 2007, we executed an agreement to sell the Wireline Businesses (including
CloseCall, AFN and the Internet service provider companies) to USA. Pursuant
to
the USA Purchase Agreement, we closed the sale of the Internet service provider
companies to USA on July 18, 2007 and received cash proceeds of $2,500,000,
a
promissory note for $2,000,000 and preferred stock convertible into 7.5%
of the
fully diluted shares of USA’s common stock valued at $8.1 million.
Simultaneously, we used $2,000,000 of this cash to pay down principal and
accrued interest owed to Cornell Capital under the debentures.
The
sale
of CloseCall and AFN requires the receipt of certain state regulatory approvals
before it can be completed. The receipt of all of the approvals may not occur
until the end of calendar 2007. Upon the close and pursuant to the terms
of the
USA Purchase Agreement, are scheduled to receive additional cash proceeds
of
$19.4 million, including payment of the $2.0 million promissory note. Using
cash
proceeds from the sale of the remainder of the Wireline Business, we expect
to
be in a position to retire the Cornell Capital debentures plus accrued interest.
If
the
sale of the Wireline Businesses is not completed pursuant to the negotiated
terms by December 31, 2007, the Company will not have the ability to continue
as
a going concern beyond the third quarter of the current fiscal year without
a
significant restructuring of the Cornell Capital debt.
We
Have Lost Money Historically Which Means That We May Not Be Able to Continue
Operations
The
Company has historically lost money. The Company’s accumulated deficit at June
30, 2007 was $82,259,910. In the three months ended June 30, 2007, the Company
incurred a net loss of $4,988,665. In the years ended March 31, 2007, 2006
and
2005, the Company sustained net losses of $45,898,288, $10,176,407 and
$5,359,722, respectively. During these periods, most of the acquired businesses
of Mobilepro have experienced declining revenues. Although restructuring
measures have reduced other operating expenses, the Company has been unable
to
reduce the corresponding costs of services. In addition, the Company has
funded
the start-up and operations of the municipal wireless networks and online
gaming
businesses without these companies achieving expected revenues. As a result,
the
amounts of cash used in operations during the fiscal quarter ended June 30,
2007
and the fiscal year ended March 31, 2007 were $1,111,698 and $6,558,708,
respectively. Future losses are likely to occur. Accordingly, the Company
will
continue to experience liquidity and cash flow problems if it is unable to
improve its operating performance, to sell assets for cash, or to raise
additional capital as needed and on acceptable terms.
We
Do Not Have Enough Registered Shares to Cover the Scheduled Debenture Payments
with Our Common Stock
To
date,
Cornell Capital has been a significant source of capital for the Company,
providing financing in several forms. Most recently, the Company has borrowed
funds under a series of convertible debentures. The total amount owed to
Cornell
Capital under the debentures at March 31, 2007 was $18,149,650. Using shares
of
its common stock registered on Form S-3 in November 2006, the Company made
principal and interest payments on the debentures that totaled $4,880,489
during
the fiscal year ended March 31, 2007, and that totaled $1,967,908 from April
2007 through May 2007. However, the supply of shares registered for Cornell
Capital’s benefit related to the convertible debentures has been exhausted.
Cornell Capital has agreed to delay additional installment payments until
January 2008 when the Company will be obligated to make total weekly principal
payments of $375,000 plus accrued interest. Unless additional shares are
registered by the Company under the Securities Act of 1933 (the “Securities
Act”), shares acquired by Cornell Capital are tradable under Rule 144 of the
Securities Act, or shares of the Company’s common stock are otherwise freely
tradable by Cornell Capital without restriction, the Company will be required
to
make these payments in cash. However, in the event that the Company or Cornell
Capital receives a legal opinion that Cornell Capital is eligible to sell
shares
of the Company’s common stock under Rule 144, the Company will be required to
resume making weekly payments of principal and accrued interest with shares
of
its common stock in September 2007.
Because
of the decline in the total market value of the outstanding shares of our
common
stock, we are not now eligible to use Form S-3 for primary issuances of shares
of our common stock. As a result, we may be required to use a more extensive
and
time-consuming process in order to register additional shares of our common
stock in the future.
The
Company may not have the ability to continue as a going concern beyond the
third
quarter of the current fiscal year without the closing of the CLEC portion
of
the sale of the Wireline Businesses described above or a significant
restructuring of the Cornell Capital debentures.
Legal
Actions May Be Required by Us in order to Enforce Certain Legal Rights
The
telecommunications industry includes hundreds of companies, many with
substantially greater infrastructure, financial, personnel, technical,
marketing, and other resources, and larger numbers of established customers
and
more prominent name recognition than us. We transact business with certain
of
these companies. In addition, certain of our businesses operate in areas
of the
industry that are subject to federal and/or state regulations. As a result,
in
order to enforce rights under negotiated contracts with transaction partners
or
to obtain the benefits of certain government regulations, we may be forced
to
initiate or to participate in legal action. For example, as discussed in
the
third matter included in the “Legal Proceedings” section of this report, Davel
is engaged in a lengthy and expensive legal process relating to the nonpayment
of dial-around compensation by large, long distance carriers. Using their
greater resources, defendants may take actions that stretch the duration
of
litigation and substantially delay our receipt of the benefits of favorable
legal decisions.
Federal
Regulators Have Taken and May Take Positions in the Future 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 or Cease
Operations
As
a
publicly traded telecommunications company, we are subject to the regulatory
scrutiny of both the FCC and the SEC. Both agencies are so-called
“administrative agencies” with statutory authority to implement and enforce laws
passed by the U.S. Congress. Despite this limited scope, 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. For instance, the FCC has been repeatedly overruled by federal
courts in recent years for misinterpretations of the 1996 Telecom Act. 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 any registration statement
“go effective” may be impeded if in its comments to a future registration
statement the SEC were to take a position with which we disagree based on
prior
law, regulation or prior SEC interpretative guidance. The registration process
that resulted in our Form S-3 becoming effective in November 2006 commenced
in
September 2005 with the filing of Form SB-2. The protracted registration
process
included the filing of several registration statement amendments in order
to
incorporate changes from the SEC received in a series of comment letters.
If we
were to encounter similar difficulties and a prolonged registration process
in
connection with a future registration statement, it could 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 or cease operations.
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 $30,028,114 for the fiscal year ended
March 31, 2007 compared with $40,305,697 for the corresponding period of
the
prior year, a decline of 25.5%.
If
the
revenues continue to decline, it is likely that additional consolidated
operating losses will be incurred by Davel and anticipated proceeds from
additional sales of groups of payphones may not be realized.
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.
The
offering registered a large percentage of the shares of common stock held
by
current and former executive officers and directors. While we are not aware
of
any plans of any current officer or director to sell shares, it is likely
that
former officers of the Company whose service with us is being terminated
in
connection with the business disposition transactions described herein may
sell
shares held by them.
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 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, the SEC issued a comment stating that it believed
that
the repayment of promissory notes to Cornell Capital using proceeds from
advances under the SEDA may have somehow violated Section 5 of the Securities
Act of 1933 (the “Securities Act”). We requested guidance from the SEC regarding
these transactions and how the transactions we had completed implicated Section
5. The only 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 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 new
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 notes payable
to Cornell Capital were repaid during the quarter ended June 30, 2006, and
no
such notes were payable to Cornell Capital at March 31, 2007.
Accordingly,
we do not believe that these transactions constitute a violation of the
Securities Act. However, 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, we could experience 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. Any claim would be bound by the one-year statute
of
limitations under Section 13 of the Securities Act.
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.
The
Federal and State Regulations under Which We Operate Could Change,
Resulting in Harm to Our Business
The
enactment of the Telecommunications Act of 1996 significantly altered the
regulatory landscape in which our businesses operate. In addition, state
regulators maintain jurisdiction over certain over our services. We cannot
predict whether future FCC or state regulatory decisions may adversely affect
our ability to operate certain of our business or impact our
profitability.
Although
the Telecommunications Act of 1996, as implemented by the FCC, addressed
certain
historical inequities in the payphone marketplace, uncertainties relating
to the
impact and timing of the implementation of this framework still exist. The
uncertainty with the greatest potential financial impact relates to revenue
from
and collectibility of access code calls and toll-free dialed calls, or dial
around compensation. Dial around compensation accounts for a material percentage
of our revenues. Historically, many parties legally obligated by the FCC
to pay
dial around compensation have nevertheless failed to do so. We believe that
such
failures 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 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.
Our
Payphone Division’s Revenue Is Subject to 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:
|
It
is traded at a price of less than $5.00 per share;
|
|
|
It
is not traded on a “recognized” national exchange;
|
|
|
|
|
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
|
|
|
|
|
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.
|
|
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.
These
disclosure requirements may have the effects of reducing the number of potential
investors and the level of trading activity in the secondary market for the
stock that is subject to these penny stock rules. Consequently, these penny
stock rules may affect the ability of broker-dealers to trade our securities.
This may make it more difficult for investors in our common stock to sell
shares
to third parties or to otherwise dispose of them. This could cause our stock
price to decline. We believe that the penny stock rules discourage investor
interest in and limit the marketability of our common stock.
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.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
In
the
period November 27, 2006 through May 10, 2007, the Company issued a total
of
55,089,635 unregistered shares of its common stock to Cornell Capital in
satisfaction of its obligation under the Amended Debenture to make weekly
installment principal payments plus interest in the total amount of
$3,252,649.
In
the
period January 11, 2007 through May 10, 2007, the Company issued a total
of
120,689,655 unregistered shares of its common stock to Cornell Capital in
satisfaction of its obligation under the Amended Debenture to make weekly
installment principal payments plus interest in the total amount of
$3,595,740.
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 Corp. 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 June
30,
2007. Please see the Risk Factor presented above titled “The Failure of Gobility
to Raise Capital May Result in Our Payment of Transferred Liabilities”.
Item
4. Submission of Matters to a Vote of Security Holders.
There
were no matters submitted to the stockholders for a vote during the three
months
ended June 30, 2007.
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
|
Asset
Purchase Agreement, dated as of December 29, 2006, by and among
TeleCommunication Systems, Inc., Mobilepro Corp., and CloseCall
America,
Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 10, 2007
|
|
|
|
|
|
|
2.2
|
Purchase
Agreement, dated as of June 29, 2007, by and between Mobilepro
Corp. and
United Systems Access, Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 6, 2007
|
|
|
|
|
|
|
2.3
|
Amendment
to the Purchase Agreement by and between Mobilepro Corp. and United
Systems Access, Inc., dated July 6, 2007
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 6, 2007
|
|
|
|
|
|
|
2.4
|
Second
Amendment to the Purchase Agreement by and between Mobilepro Corp.
and
United Systems Access, Inc., dated July 13, 2007
|
|
Incorporated
by reference to Exhibit 10.03 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
|
|
|
|
|
|
2.5
|
Third
Amendment to the Purchase Agreement by and between Mobilepro Corp.
and
United Systems Access, Inc., dated July 13, 2007
|
|
Incorporated
by reference to Exhibit 10.04 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
|
|
|
|
|
|
2.6
|
Management
Agreement, dated as of July 18, 2007, by and between Mobilepro
Corp.,
United Systems Telecom Access, Inc. and United Systems Access,
Inc.
|
|
Incorporated
by reference to Exhibit 10.05 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
|
|
|
|
|
|
2.7
|
Purchase
Agreement, dated as of July 8, 2007, by and between Mobilepro Corp.
and
Gobility, Inc.
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 10, 2007
|
|
|
|
|
|
|
2.8
|
Convertible
Debenture issued to Mobilepro Corp. by Gobility, Inc., made as
of July 8,
2007
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 10, 2007
|
|
|
|
|
|
|
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
|
|
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
|
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
|
|
|
|
|
|
|
10.5
|
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
|
|
|
|
|
|
|
10.6
|
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
|
|
|
|
|
|
|
10.7
|
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
|
|
|
|
|
|
|
10.8
|
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
|
|
10.9
|
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
|
|
|
|
|
|
|
10.10
|
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
|
|
10.11
|
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
|
|
10.12
|
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
|
|
|
|
|
|
|
10.13
|
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
|
|
|
|
|
|
|
10.14
|
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
|
|
|
|
|
|
|
10.15
|
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
|
|
|
|
|
|
|
10.16
|
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
|
|
|
|
|
|
|
10.17
|
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
|
|
|
|
|
|
|
10.18
|
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
|
|
|
|
|
|
|
10.19
|
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
|
|
|
|
|
|
|
10.20
|
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
|
|
|
|
|
|
|
10.21
|
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
|
|
|
|
|
|
|
10.22
|
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
|
|
10.23
|
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
|
|
|
|
|
|
|
10.24
|
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
|
|
|
|
|
|
|
10.25
|
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
|
|
|
|
|
|
|
10.26
|
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
|
|
|
|
|
|
|
10.27
|
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
|
|
|
|
|
|
|
10.28
|
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
|
|
|
|
|
|
|
10.29
|
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
|
|
|
|
|
|
|
10.30
|
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
|
|
|
|
|
|
|
10.31
|
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
|
|
|
|
|
|
|
10.32
|
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
|
|
|
|
|
|
|
10.33
|
Master
Equipment Lease dated September 27, 2006, between Data Sales Co.,
Mobilepro Corp., and Kite Networks, Inc.
|
|
Incorporated
by reference to Exhibit 10.46 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.34
|
Amendment
No. 1 to Convertible Debentures issued to Cornell Capital, dated
January
17, 2007
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on January 23, 2007
|
|
|
|
|
|
|
10.35
|
Amendment
No. 2 to Convertible Debenture
issued
to Cornell Capital, dated February 20, 2007
(the
$15,149,650 debenture)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on February 26, 2007
|
|
10.36
|
Amendment
No. 2 to Convertible Debentures
issued
to Cornell Capital, dated February 20, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on February 26, 2007
|
|
|
|
|
|
|
10.37
|
Amendment
No. 3 to Convertible Debentures
issued
to Cornell Capital, dated April 2, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on April 5, 2007
|
|
|
|
|
|
|
10.38
|
Consent
and Waiver Agreement dated March 30, 2007 with Cornel Capital
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on April 5, 2007
|
|
|
|
|
|
|
10.39
|
Amendment
No. 4 to Convertible Debentures
issued
to Cornell Capital, dated May 11, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on May 15, 2007
|
|
|
|
|
|
|
10.40
|
Promissory
Note, dated May 11, 2007, issued to Cornell Capital
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on May 15, 2007
|
|
|
|
|
|
|
10.41
|
Amendment
No. 5 to Convertible Debentures
issued
to Cornell Capital, dated July 18, 2007
(the
$7,000,000 debentures)
|
|
Incorporated
by reference to Exhibit 10.01 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
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|
|
|
|
|
|
10.42
|
Amendment
No. 3 to Convertible Debenture
issued
to Cornell Capital, dated July 18, 2007
(the
$15,149,650 debenture)
|
|
Incorporated
by reference to Exhibit 10.02 to the Registrant’s Current Report on Form
8-K filed on July 19, 2007
|
|
|
|
|
|
|
21.1
|
Subsidiaries
of Registrant
|
|
Incorporated
by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form
10-KSB filed on June 29, 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
|
|
*
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.
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|
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MOBILEPRO
CORP.
|
|
|
|
Date: August
9, 2007 |
By: |
/s/
Jay O.
Wright |
|
Jay
O. Wright, Chief Executive
Officer |
|
|
|
Date: August
9, 2007 |
By: |
/s/
Richard H. Deily |
|
Richard
H. Deily, Chief Accounting Officer
|