UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended October
31, 2007
OR
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the
transition period from __________
to __________
Commission
file number 1-11601
iDNA,
INC.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
34-1816760
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
415
Madison Avenue, 7th Floor, New York, New York
|
|
10017
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(212)
644-1400
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Class
|
|
Outstanding
at December 12, 2007
|
Common
Stock, $0.05 par value
|
|
9,954,614
|
iDNA,
Inc. and Subsidiaries
TABLE
OF CONTENTS
|
|
PAGE
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
3
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of October 31, 2007 and January 31,
2007
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three Months and Nine
Months
Ended October 31, 2007 and 2006
|
5
|
|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for
the Nine Months Ended October 31, 2007
|
6
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended October
31, 2007 and 2006
|
7
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
41
|
|
|
|
Item
4.
|
Controls
and Procedures
|
42
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
43
|
Item
1A.
|
Risk
Factors
|
44
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
Item
3.
|
Defaults
Upon Senior Securities
|
44
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
44
|
Item
5.
|
Other
Information
|
44
|
Item
6.
|
Exhibits
|
44
|
|
|
|
Signatures
|
|
46
|
|
|
|
Certifications
|
|
47
|
PART
I. FINANCIAL INFORMATION
Item
1.
Financial Statements.
REPORT
OF
INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders of
iDNA,
Inc. and Subsidiaries
New
York,
New York
We
have
reviewed the accompanying condensed consolidated balance sheet of iDNA, Inc.
and
Subsidiaries as of October 31, 2007, the related condensed consolidated
statements of operations for each of the three-month and nine-month periods
ended October 31, 2007 and 2006, the related condensed consolidated statement
of
stockholders’ equity and comprehensive loss for the nine-month period ended
October 31, 2007 and the condensed consolidated statements of cash flows for
each of the nine-month periods ended October 31, 2007 and 2006. These financial
statements are the responsibility of the Company’s management.
We
conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”). A review of interim
financial information consists principally of applying analytical procedures
and
making inquiries of persons responsible for financial and accounting matters.
It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be made
to the condensed consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
We
have
previously audited, in accordance with standards of the PCAOB, the consolidated
balance sheet as of January 31, 2007, and the related consolidated statements
of
operations, stockholders’ equity and comprehensive loss, and cash flows for the
year then ended (not presented herein); and in our report dated May 3, 2007,
we
expressed an unqualified opinion on those consolidated financial statements.
In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 31, 2007, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it
has been derived.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
|
|
October
31,
|
|
January
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
291
|
|
$
|
548
|
|
Restricted
cash (Note 1)
|
|
|
147
|
|
|
147
|
|
Accounts
receivable, net of allowance of $67 and $82, respectively (Note
1)
|
|
|
2,476
|
|
|
1,796
|
|
Income
taxes refundable
|
|
|
19
|
|
|
19
|
|
Inventory
(Note 1)
|
|
|
113
|
|
|
232
|
|
Prepaid
expenses
|
|
|
309
|
|
|
293
|
|
Other
current assets
|
|
|
171
|
|
|
115
|
|
Total
current assets
|
|
|
3,526
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $3,170 and $2,833,
respectively (Note 1)
|
|
|
2,213
|
|
|
2,752
|
|
Investment
in AFC (Note 2)
|
|
|
6,958
|
|
|
7,224
|
|
Goodwill
(Note 1)
|
|
|
2,728
|
|
|
2,728
|
|
Other
intangible assets, net of accumulated amortization of $2,790 and
$2,183,
respectively (Note 1)
|
|
|
5,508
|
|
|
6,115
|
|
Other
assets
|
|
|
108
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,041
|
|
$
|
22,078
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long term obligations (Note 3)
|
|
$
|
711
|
|
$
|
805
|
|
Accounts
payable
|
|
|
1,822
|
|
|
1,621
|
|
Accrued
income taxes
|
|
|
361
|
|
|
298
|
|
Deferred
revenue (Note 1)
|
|
|
1,915
|
|
|
1,033
|
|
Self-insurance
claims (Note 4)
|
|
|
235
|
|
|
235
|
|
Other
liabilities
|
|
|
1,491
|
|
|
1,445
|
|
Total
current liabilities
|
|
|
6,535
|
|
|
5,437
|
|
|
|
|
|
|
|
|
|
Long
term obligations (Note 3)
|
|
|
10,986
|
|
|
11,071
|
|
Convertible
promissory note (Note 3)
|
|
|
2,825
|
|
|
2,825
|
|
|
|
|
20,346
|
|
|
19,333
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 4)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
-
|
|
Common
stock - $.05 par value, authorized 50,000,000 shares, issued 39,949,589
and 39,949,589 shares, respectively
|
|
|
1,997
|
|
|
1,997
|
|
Additional
paid-in capital
|
|
|
175,176
|
|
|
174,837
|
|
Retained
deficit
|
|
|
(154,326
|
)
|
|
(151,699
|
)
|
Deferred
compensation
|
|
|
(24
|
)
|
|
(41
|
)
|
Treasury
stock, at cost, 29,994,975 and 30,294,975 shares,
respectively
|
|
|
(22,128
|
)
|
|
(22,349
|
)
|
Total
stockholders' equity
|
|
|
695
|
|
|
2,745
|
|
|
|
$
|
21,041
|
|
$
|
22,078
|
|
See
accompanying notes to condensed consolidated financial
statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
October
31,
|
|
Nine
Months Ended
October
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(Note 1)
|
|
$
|
5,070
|
|
$
|
4,758
|
|
$
|
11,494
|
|
$
|
11,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues (Note 1)
|
|
|
2,501
|
|
|
2,554
|
|
|
7,067
|
|
|
6,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,569
|
|
|
2,204
|
|
|
4,427
|
|
|
4,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,390
|
|
|
2,452
|
|
|
7,073
|
|
|
7,367
|
|
Impairment
charge (Note 6)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
179
|
|
|
(248
|
)
|
|
(2,646
|
)
|
|
(7,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from AFC investment (Note 2)
|
|
|
148
|
|
|
191
|
|
|
484
|
|
|
451
|
|
Interest
income
|
|
|
1
|
|
|
4
|
|
|
4
|
|
|
10
|
|
Interest
expense (Note 3)
|
|
|
(59
|
)
|
|
(216
|
)
|
|
(172
|
)
|
|
(579
|
)
|
Interest
expense abatement (Note 3)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
269
|
|
|
(269
|
)
|
|
(2,330
|
)
|
|
(6,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
(14
|
)
|
|
(11
|
)
|
|
(18
|
)
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
255
|
|
|
(280
|
)
|
|
(2,348
|
)
|
|
(6,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations,
net of tax
|
|
|
-
|
|
|
1
|
|
|
8
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
255
|
|
$
|
(279
|
)
|
$
|
(2,340
|
)
|
$
|
(6,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.03
|
|
$
|
(.03
|
)
|
$
|
(.24
|
)
|
$
|
(.72
|
)
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss) per share
|
|
$
|
.03
|
|
$
|
(.03
|
)
|
$
|
(.24
|
)
|
$
|
(.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
9,955
|
|
|
9,098
|
|
|
9,924
|
|
|
9,072
|
|
See
accompanying notes to condensed consolidated financial
statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statement of Stockholders’ Equity
and
Comprehensive Loss
Nine
Months Ended October 31, 2007
(in
thousands, except share data)
(unaudited)
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
Deferred
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
Paid-In
Capital
|
|
Retained
Deficit
|
|
Treasury
Stock
|
|
Compensation
Expense
|
|
Total
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
39,949,589
|
|
$
|
1,997
|
|
$
|
174,837
|
|
$
|
(151,699
|
)
|
$
|
(22,349
|
)
|
$
|
(41
|
)
|
$
|
2,745
|
|
|
|
|
Cummulative
adjustment for the adoption of FIN 48 (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,340
|
)
|
|
|
|
|
|
|
|
(2,340
|
)
|
$
|
(2,340
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
Treasury
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
221
|
|
|
|
|
|
14
|
|
|
|
|
Deferred
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
39,949,589
|
|
$
|
1,997
|
|
$
|
175,176
|
|
$
|
(154,326
|
)
|
$
|
(22,128
|
)
|
$
|
(24
|
)
|
$
|
695
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
|
Nine
Months Ended
October
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,340
|
)
|
$
|
(6,568
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,233
|
|
|
1,206
|
|
Impairment
charge
|
|
|
-
|
|
|
4,482
|
|
Income
from AFC investment
|
|
|
(484
|
)
|
|
(451
|
)
|
Share-based
compensation expense
|
|
|
211
|
|
|
200
|
|
Stock
issued as compensation for services rendered
|
|
|
128
|
|
|
5
|
|
Amortization
of deferred compensation expense
|
|
|
17
|
|
|
17
|
|
Loss
on disposal of assets
|
|
|
10
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(680
|
)
|
|
145
|
|
Accrued
income tax/refundable
|
|
|
(17
|
)
|
|
(55
|
)
|
Accounts
payable
|
|
|
201
|
|
|
100
|
|
Deferred
revenue
|
|
|
882
|
|
|
236
|
|
Other
operating assets and liabilities, net
|
|
|
94
|
|
|
(38
|
)
|
Net
cash used in operating activities
|
|
|
(745
|
)
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from AFC distributions
|
|
|
750
|
|
|
1,207
|
|
Purchase
of letter of credit, increase in restricted cash
|
|
|
-
|
|
|
(147
|
)
|
Purchase
of other property and equipment
|
|
|
(97
|
)
|
|
(533
|
)
|
Net
cash provided by investing activities
|
|
|
653
|
|
|
527
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of promissory note
|
|
|
-
|
|
|
1,000
|
|
Proceeds
from borrowings under a capital lease
|
|
|
|
|
|
102
|
|
Proceeds
from exercise of stock options
|
|
|
14
|
|
|
-
|
|
Payments
to retire due to former OTI Members
|
|
|
-
|
|
|
(530
|
)
|
Payments
on debt, notes payable and capital lease
|
|
|
(179
|
)
|
|
(341
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(165
|
)
|
|
231
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(257
|
)
|
|
37
|
|
Cash
and cash equivalents at beginning of period
|
|
|
548
|
|
|
1,144
|
|
Cash
and cash equivalents at end of period
|
|
$
|
291
|
|
$
|
1,181
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
175
|
|
$
|
99
|
|
Income
taxes paid
|
|
$
|
17
|
|
$
|
55
|
|
See
accompanying notes to condensed consolidated financial
statements
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting
Policies
General
The
accompanying unaudited condensed consolidated financial statements include
the
accounts
of iDNA, Inc. and its subsidiaries (“iDNA”). iDNA’s operations are comprised of
three principal reportable segments: (i) strategic communications services,
(ii)
information services and (iii) entertainment. iDNA manages each segment
separately as a consequence of different marketing, service requirements and
technology strategies (see Note 5).
The
strategic communications services segment provides content development via
the
design, development and production of media, collateral material, logistics,
support and/or broadcast services for presentations at corporate and
institutional events, meetings, training seminars and symposiums. The
presentations may be live at single or multi-site venues and can include video
conferencing, satellite broadcasting and webcasting or the presentations may
be
provided via on-demand access via internet websites, DVD or video
tape.
The
information services segment utilizes custom wireless communication technology
and proprietary software to facilitate client audience interaction,
participation and polling to collect, exchange and/or analyze data and
information in real-time during a meeting or event. The wireless communication
services are available as a turn-key service provided by iDNA during a scheduled
meeting or event or alternatively, a client can purchase from iDNA the required
electronic components and related proprietary software to administer its needs
independently.
As
a
consequence of iDNA’s investment in the Angelika Film Centers, LLC (“AFC”), iDNA
operates in the movie exhibition and entertainment industry (see Note
2).
The
financial statements are unaudited but in the opinion of management, reflect
all
adjustments (consisting only of normal recurring accruals) necessary for a
fair
presentation of iDNA’s consolidated financial position, results of operations,
stockholders’ equity and comprehensive loss, and cash flows for the periods
presented.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the rules of the Securities and Exchange
Commission applicable to interim financial statements and therefore do not
include all disclosures that might normally be required for financial statements
prepared in accordance with generally accepted accounting principles. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with iDNA’s consolidated financial statements, including the
notes thereto, appearing in iDNA’s Annual Report on Form 10-K for the year ended
January 31, 2007. The results of operations for the three months and nine months
ended October 31, 2007 are not necessarily indicative of operating results
that
may be achieved over the course of the full year.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
The
preparation of financial statements and the accompanying notes thereto, in
conformity with generally accepted accounting principles, requires management
to
make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities
at the
date of the financial statements and reported amounts of revenues and expenses
during the respective reporting periods. Examples include provision for bad
debt, useful lives of property and equipment and intangible assets, impairment
of property and equipment and intangible assets, deferred income taxes, self
insurance claims and assumptions related to equity-based compensation. Actual
results could differ from those estimates.
iDNA
uses
a January 31 year-end for financial reporting purposes. References herein to
the
term “Fiscal 2008” shall mean iDNA’s fiscal year ending January 31, 2008 and
references to other “Fiscal” years shall mean the year that ended (or ends, as
the case may be) on January 31 of the year indicated. The term the “Company” or
“iDNA” as used herein refers to iDNA, Inc. together with its consolidated
subsidiaries unless the context otherwise requires.
Revenues
iDNA’s
revenues are earned within short time periods, generally less than one week.
iDNA recognizes revenue from its strategic communications segment, including
the
video production, video editing, meeting services and broadcast satellite or
webcast services, and its information services segment when the services are
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. iDNA does not have licensing or other arrangements that result
in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts
are
deferred until the sale and delivery are complete. Deferred production costs
of
$171,000 and $115,000, respectively, are reported as other current assets at
October 31, 2007 and January 31, 2007.
iDNA
recognizes revenue from the sale of electronic equipment, proprietary software
and related components at the time of shipment. Deposits and other prepayments
received prior to shipment are recorded as deferred revenue until the electronic
equipment and related software are shipped. iDNA has licensing and technical
support arrangements for future software enhancements and upgrades for technical
support for previously delivered electronic equipment. Revenues derived from
licensing and technical support are recognized over the term of the licensing
and technical support period, which generally are sold in increments of one
year
of coverage. For the three months ended October 31, 2007 and 2006, electronic
equipment sales were $560,000 and $708,000, respectively. For the nine months
ended October 31, 2007 and 2006, electronic equipment sales were $1.6 million
and $2.0 million, respectively.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Cost
of Revenues
Cost
of
revenues consists of direct expenses specifically associated with client service
revenues. The cost of revenues includes direct salaries and benefits, purchased
products or services for clients, web hosting, support services, shipping and
delivery costs.
Research
and Development Costs
Research
and development costs are comprised principally of personnel costs incurred
for
enhancements, modifications, updates, service and support expenditures for
iDNA’s proprietary software. Research and development costs are charged to
operations as incurred and are included as a component of costs of revenues.
iDNA charged $96,000 and $101,000, respectively, to research and development
expense for the three months ended October 31, 2007 and 2006. iDNA charged
$305,000 and $299,000, respectively, to research and development expense for
the
nine months ended October 31, 2007 and 2006.
Restricted
Cash
In
June
2006, iDNA obtained a letter of credit in an amount of $147,000 that was issued
in favor of the landlord of iDNA’s new New York headquarters. The letter of
credit is collateralized by an interest bearing money market account in the
same
amount. Therefore, $147,000 is classified as restricted cash as of October
31,
2007
and January 31, 2007.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is iDNA's best estimate of the amount of
probable credit losses in iDNA's existing accounts receivable. iDNA determines
the allowance based on analysis of historical bad debts, client concentrations,
client credit-worthiness and current economic trends. iDNA reviews its allowance
for doubtful accounts quarterly. Past-due balances over 90 days and specified
other balances are reviewed individually for collectibility. All other balances
are reviewed on an aggregate basis. Account balances are written off against
the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. iDNA does not have any off-balance sheet
credit exposure related to its clients.
Inventory
Inventory
is comprised principally of electronic equipment and related components held
for
sale to clients. Inventory is valued at the lower of cost or market using the
first-in - first-out inventory cost method.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from eighteen months to ten years. Leasehold improvements are amortized over
the
shorter of the lease term or the estimated useful lives of the related
improvements.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Goodwill
and Other Intangible Assets
Intangible
assets with indefinite lives, including goodwill, are not subject to
amortization but are subject to testing for impairment at least annually or
whenever there is an impairment indicator (see Note 6).
In
its
acquisition of Option Technologies Interactive, LLC (“OTI”), iDNA acquired
certain intangible assets including client relationships and lists and a
non-competition agreement with an aggregate fair value of $703,000. The useful
lives of these intangibles are estimated to be 5 to 7 years. The intangible
assets with definite useful lives are amortized using the straight-line method
over those lives. For the three months ended October
31, 2007 and 2006,
iDNA charged to operations $26,000 and $12,000, respectively, for the
amortization of these intangible assets. For the nine months ended October
31, 2007 and 2006,
iDNA charged to operations $78,000 and $88,000, respectively, for the
amortization of these intangible assets.
In
its
acquisition of Audience Response Systems, Inc. and the Campus Group Companies,
Inc. (collectively, the “Campus Group”), iDNA acquired certain intangible assets
including client relationships and lists and a non-competition agreement with
an
initial aggregate fair value of $9.5 million. The useful lives of these
intangibles were initially estimated to be 17 years and 9 years, respectively.
In connection with iDNA’s impairment analysis, effective July 31, 2006, among
other adjustments, the estimated useful life of the client relationships was
revised to 10 years. The intangible assets with definite useful lives are
amortized using the straight-line method over those lives. For the three months
ended October
31,
2007
and 2006, iDNA charged to operations $176,000 and $153,000, respectively for
the
amortization of these intangible assets. For the nine months ended October
31,
2007
and 2006, iDNA charged to operations $529,000 and $437,000, respectively, for
the amortization of these intangible assets.
Valuation
of Long-Lived Assets and Goodwill
iDNA
reviews the carrying value of its long-lived assets (other than goodwill)
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. When indicators of impairment exist, iDNA determines
whether the estimated undiscounted sum of the future cash flows from such assets
is less than their carrying amounts. If less, an impairment loss is recognized
in the amount, if any, by which the carrying amount of such assets exceeds
their
respective fair values. The determination of fair value is based on quoted
market prices in active markets, if available, or independent appraisals; sales
price negotiations; or projected future cash flows discounted at a rate
determined by management to be commensurate with iDNA’s business risk. The
estimation of fair value utilizing discounted forecasted cash flows includes
significant judgments regarding assumptions of revenue, operating and marketing
costs; selling and administrative expenses; interest rates; property and
equipment additions and retirements; industry competition; and general economic
and business conditions, among other factors.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Income
Taxes
Deferred
income taxes are provided for all temporary differences between the book and
tax
basis of assets and liabilities. Deferred income taxes are adjusted to reflect
new tax rates when they are enacted into law. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is recognized if it
is
anticipated that some or all of a net deferred tax asset may not be
realized.
In
February 2007, iDNA adopted the provisions of FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
(“FIN
48”), an interpretation of FASB Statement No. 109, Accounting
for Income Taxes.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
recognition and measurement of a tax position taken or expected to be taken
on a
tax return. The interpretation requires that iDNA recognize the impact of a
tax
position in the financial statements if that position is less likely than not
of
being sustained on audit, based on the technical merits of the position. FIN
48
also provides guidance on derecognition classification, interest and penalties,
accounting in interim periods and disclosure. In accordance with the provisions
of FIN 48, any cumulative effect resulting from the change in accounting
principle is to be recorded as an adjustment to the opening balance of retained
earnings (deficit).
As
a
consequence of the adoption of the provisions of FIN 48, iDNA recorded an
adjustment to retained deficit of $80,000 to reflect potential liabilities
for
iDNA’s uncertain tax positions, inclusive of interest. In addition, iDNA’s tax
years open for examination vary by jurisdiction. iDNA was last under examination
by the IRS for the taxable years through January 31, 1998. iDNA recognizes
interest and penalties associated with uncertain tax positions as a component
of
tax expense (benefit).
As
of
January 31, 2007, iDNA had federal net operating loss carryforwards of $88.8
million that may be used to reduce future taxable income, subject to
limitations. Largely as a consequence of these operating loss carryforwards,
iDNA reported a net deferred tax asset of $39.4 million and an offsetting
valuation allowance of $39.4 million since iDNA is unable to determine, at
this
time, that it more likely than not will generate future taxable income against
which the net operating loss could be applied.
Effective
November 3, 2000, iDNA repurchased shares of its common stock, $0.05 par value,
(“Common Stock”) and underwent a “change in ownership” as defined for the
purposes of Sections 382 and 383 of the Internal Revenue Code. As a consequence
of this “change in ownership”, the use of net operating loss carryforwards
totaling $61.0 million incurred prior to November 3, 2000 (“pre-change losses”)
will be subject to significant annual limitation. Based upon an evaluation
of
the tax position regarding the Section 382 limitation on the pre-change losses,
iDNA has determined that $5.9 million of these pre-change losses may expire
unused resulting in a tax-effected reduction of $2.1 million to iDNA’s net
operating loss carryforwards included in its net deferred tax asset. As a
consequence of this evaluation, as of February 1, 2007 iDNA (i) reduced the
amount of its net deferred tax asset attributable to its net operating loss
carryforwards by $2.1 million, thereby reducing its total net deferred tax
asset
from $39.4 million to $37.3 million, and (ii) reduced iDNA’s valuation allowance
by $2.1 million from $39.4 million to $37.3 million. These adjustments offset
one another, resulting in no net charge to iDNA’s opening retained deficit
reported for the nine months ended October 31, 2007.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Stock-Based
Compensation
Effective
February 1, 2006, iDNA adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based
Payment
(“SFAS
No. 123(R)”), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”), and superseded APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) requires all share-based payments to employees, including grants
of
employee stock options, to be recognized in the financial statements based
on
their fair values beginning with the first interim or annual period after
December 15, 2005. iDNA elected the prospective method of adopting SFAS No.
123(R) which requires that compensation expense be recorded over the remaining
periods for what would have been the remaining fair value under SFAS No. 123
of
all unvested stock options and restricted stock at the beginning of the first
quarter of adoption. The compensation costs for that portion of awards is based
on the grant-date fair value of the awards as calculated for pro forma
disclosures under SFAS No. 123. iDNA charged to operations $60,000 and $60,000,
respectively, for share-based compensation for the three months ended October
31, 2007 and 2006. iDNA charged to operations $211,000 and $200,000,
respectively, for share-based compensation for the nine months ended October
31,
2007 and 2006.
Earnings
Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of iDNA, $0.05 par value common stock (“Common
Stock”) outstanding for the period. Dilutive earnings per share for all periods
presented is the same as basic earnings per share because the inclusion of
common stock,
in the
form of stock options and warrants, would have an anti-dilutive effect on income
(loss) per share for the three months and nine months ended October 31, 2007
and
2006. For the nine months ended October 31, 2007 and 2006, iDNA excluded 39,711
and 0, respectively, from the earnings (loss) per share computation due to
their
dilutive effect. For three months ended October 31, 2007 and 2006, there were
no
common stock equivalents excluded for the earnings per share computation due
to
their dilutive effect.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair
Value Measurement
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with Generally Accepted Accounting Principles
(“GAAP”), and expands disclosures about fair value measurements. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15,
2007. iDNA does not anticipate the application of this pronouncement will have
a
material impact on iDNA’s reported consolidated financial position or results of
operations.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007, and early application is allowed under certain circumstances. iDNA is
currently evaluating the impact SFAS No. 159 will have on its consolidated
financial position.
Reclassifications
Certain
Fiscal 2007 amounts have been reclassified to conform with Fiscal 2008
presentations.
Note
2 – Investment in AFC
On
April
5, 2000, iDNA, through its wholly owned subsidiary National Cinemas, Inc.,
acquired a 50% membership interest in AFC. AFC is the owner and operator of
the
Angelika Film Center, which is a multiplex cinema and café complex in the Soho
District of Manhattan in New York City.
AFC
is
currently owned 50% by iDNA and 50% by Reading International, Inc. (“Reading”).
The articles and bylaws of AFC provide that for all matters subject to a vote
of
the members, a majority is required, except that in the event of a tie vote,
the
Chairman of Reading shall cast the deciding vote.
iDNA
uses
the equity method to account for its investment in AFC. iDNA’s initial
investment exceeded its share of AFC’s net assets and that portion of the
investment balance is accounted for in a manner similar to goodwill. AFC uses
a
December 31 year-end for financial reporting purposes. iDNA reports on a January
31 year-end, and for its fiscal quarters ending April 30, July 31, October
31
and January 31 records its pro-rata share of AFC’s earnings on the basis of
AFC’s fiscal quarters ending March 31, June 30, September 30 and December 31,
respectively. For the three months ended October 31, 2007 and 2006, iDNA
recorded income of $148,000 and $191,000, respectively, representing its share
of AFC’s net income. For the nine months ended October 31, 2007 and 2006, iDNA
recorded income of $484,000 and $451,000, respectively, representing its share
of AFC’s net income.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
2 – Investment in AFC – continued
Summarized
income statement data for AFC for the three months and nine months ended
September 30, 2007 and 2006, respectively, is as follows (in
thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,408
|
|
$
|
1,646
|
|
$
|
4,696
|
|
$
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film
rental
|
|
|
287
|
|
|
406
|
|
|
1,144
|
|
|
1,219
|
|
Operating
costs
|
|
|
608
|
|
|
635
|
|
|
1,909
|
|
|
1,809
|
|
Depreciation
and amortization
|
|
|
195
|
|
|
195
|
|
|
585
|
|
|
532
|
|
General
and administrative expenses
|
|
|
22
|
|
|
28
|
|
|
90
|
|
|
113
|
|
|
|
|
1,112
|
|
|
1,264
|
|
|
3,728
|
|
|
3,673
|
|
Net
income
|
|
$
|
296
|
|
$
|
382
|
|
$
|
968
|
|
$
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income
|
|
$
|
148
|
|
$
|
191
|
|
$
|
484
|
|
$
|
451
|
|
Note
3 –
Current and Long Term Obligations
As
a
consequence of iDNA’s acquisition of OTI effective November 18, 2005, iDNA
issued to Flexner Wheatley & Associates (“FWA”) and MeetingNet Interactive,
Inc. (“MeetingNet”) promissory notes in an aggregate principal amount of $1.5
million (the “OTI Promissory Notes”). The OTI Promissory Notes bear interest at
5% per annum and are repayable in quarterly installments according to a formula
based upon the future cash flows realized from OTI’s operations. iDNA’s
obligations under the OTI Promissory Notes are secured by the membership
interests of OTI. At October 31, 2007, iDNA had outstanding principal
obligations under the terms of the OTI Promissory Notes of $1.0 million and
accrued interest of $13,000.
As
a
consequence of iDNA’s acquisition of the Campus Group effective July 31, 2003,
iDNA issued to Mr. Steve Campus and certain family trusts promissory notes
in an
aggregate principal amount of $9.9 million and a convertible promissory note
in
the principal amount of $2.8 million (collectively, the “Campus Notes”). Of the
$9.9 million in promissory notes issued by iDNA, $6.6 million of the promissory
notes (“Base Notes”) bear interest at 5% per annum and are repayable in
quarterly installments according to a formula based upon the future cash flows
realized from the Campus Group over a period not to exceed seven years. The
remaining $3.3 million in promissory notes (“Trailing Notes”) issued by iDNA
bear interest at 5% per annum and are repayable in quarterly installments,
commencing upon the retirement of the Base Notes, according to a formula based
upon the future cash flows realized from the Campus Group over a period not
to
exceed three years subsequent to the retirement of the Base Notes. The $2.8
million convertible promissory note (“Convertible Note”) (i) bears interest at
5% per annum, payable quarterly in cash or accumulating as principal at the
election of iDNA, (ii) requires principal payments to commence upon the
retirement of the Base Notes and Trailing Notes and is then repayable in
quarterly installments according to a formula based upon the future cash flows
realized from the Campus Group over a period not to exceed three years and
(iii)
is convertible at the option of the holder into shares of iDNA’s Common Stock at
a base conversion price of $1.50 per share. The holder may not convert the
Convertible Note into shares of iDNA’s Common Stock prior to repayment of the
Base Notes and Trailing Notes. iDNA’s obligations under the Campus Notes are
secured by the capital stock of the companies comprising the Campus Group.
At
October 31, 2007, iDNA had outstanding principal obligations under the terms
of
the Base Notes, Trailing Notes and the Convertible Note of $6.0 million, $3.3
million and $2.8 million, respectively, and accrued interest of
$156,000.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Current and Long Term Obligations –
continued
For
the
trailing twelve month period ended October 31, 2006, The Campus Group’s
financial performance had fallen below certain minimum operating cash flow
thresholds established pursuant to the terms of the Campus Notes. As a
consequence, the interest expense incurred by iDNA during the twelve month
period ended July 31, 2006 was abated. As a consequence of the interest
abatement, iDNA realized a gain from the abatement of interest on the Campus
Notes of $631,000 during the second quarter of Fiscal 2007. For the trailing
twelve month period ended October 31, 2007, the Campus Group’s financial
performance remained below the minimum operating cash flow thresholds. As a
consequence no interest was incurred on the Campus Notes during the period
February 1, 2007 through October 31, 2007. Prospectively, interest may accrue
pursuant to the terms of the Campus Notes.
As
a
consequence of iDNA’s acquisition of OMI Business Communications, Inc. (“OMI”)
effective April 1, 2003, iDNA assumed a $402,000 loan guaranteed by the U.S.
Small Business Administration (the “SBA Loan”). At October 31, 2007, the
remaining balance of the SBA Loan of $307,000 is repayable in monthly
installments of $3,309 with the last payment due in April 2017. The SBA Loan
bears interest at the rate of 4% per annum. OMI’s obligations under the SBA Loan
is collateralized by substantially all of OMI's assets and the personal
guarantee of Mr. Dean Thompson, President of OMI.
In
September 2006, OMI consummated equipment financing in the form of a capital
lease with a financing institution to acquire $102,000 in various digital media
production and editing equipment. The capital lease is payable in monthly
installments with the last payment due in July 2009 and bears an implied
interest rate of 10%. OMI’s obligations under the capital lease are
collateralized by the digital media production and editing equipment acquired
by
OMI. At October 31, 2007, the remaining balance due under the capital lease
was
$61,000. The accumulated depreciation for the underlying equipment pursuant
to
the capital lease was $40,000 and $14,000, respectively, at October 31, 2007
and
January 31, 2007.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Current and Long Term Obligations –
continued
On
July
20, 2006, iDNA consummated a Loan and Security Agreement with a lender and
issued a Promissory Note (the “Note”) in a principal amount of $1.0 million. The
lender, Seasons Go Round, is an unaffiliated third party lender. Pursuant to
the
terms of the Note, (i) the outstanding principal of the Note is due February
15,
2008, (ii) iDNA is required to pay interest only, monthly and in arrears, during
the term of the Note and (iii) the Note bears interest at fourteen percent
(14%)
per annum. iDNA may prepay the Note at any time and without a prepayment
penalty. iDNA’s obligations under the Note is secured by a perfected
first
priority security interest in and to, and a lien on and pledge of iDNA’s right,
title and interest in and to virtually all of iDNA’s assets not previously
pledged pursuant to other long term obligations. At October
31,
2007, the balance due under the Note was $1.0 million. The Note was repaid
and
retired on November 21, 2007 as a consequence of iDNA’s then consummated Master
Loan and Security Agreement with a lender in the principal amount of $4.25
million (see Note 7). As a further consequence of the consummation of Master
Loan and Security Agreement, iDNA has classified the Note as a long term
obligation at October 31, 2007.
The
components of long term obligations at October 31, 2007 are as follows (in
thousands):
|
|
Amounts
|
|
Capital
leases
|
|
$
|
61
|
|
SBA
loan
|
|
|
307
|
|
Promissory
note
|
|
|
1,000
|
|
OTI
promissory notes
|
|
|
1,008
|
|
Base
promissory notes
|
|
|
6,046
|
|
Trailing
promissory notes
|
|
|
3,275
|
|
Convertible
debt
|
|
|
2,825
|
|
|
|
|
14,522
|
|
Less
current maturities
|
|
|
(711
|
)
|
Long-term
obligations and convertible debt
|
|
$
|
13,811
|
|
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Current and Long Term Obligations –
continued
iDNA’s
current maturities and long term obligations at October 31, 2007 are as follows
(in thousands):
|
|
Amounts
|
|
2008
|
|
$
|
715
|
|
2009
|
|
|
1,033
|
|
2010
|
|
|
1,577
|
|
2011
|
|
|
515
|
|
2012
|
|
|
4,430
|
|
Thereafter
|
|
|
6,257
|
|
|
|
|
14,527
|
|
Less:
capital lease interest
|
|
|
(5
|
)
|
|
|
$
|
14,522
|
|
Note
4 – Commitments and Contingencies
Self-Insurance
Reserves for Property Damage and Personal Injury Claims
iDNA,
under the names Agency Rent-A-Car, Inc. (“ARAC”), Altra Auto Rental and Automate
Auto Rental, previously engaged in the rental of automobiles on a short-term
basis, principally to the insurance replacement market. In Fiscal 1996, iDNA
disposed of its rental fleet business through the sale of certain assets and
through certain leases to a national car rental company. All liabilities related
to the discontinued rental business, principally self-insurance claims, were
retained by ARAC.
iDNA
is
subject to certain self-insurance claims and litigation expenses relating to
its
discontinued automobile rental operations. iDNA’s management estimates the
required self-insurance liability based upon specific identification of the
known matters subject to future claims, the nature of the claim and the
estimated costs to be incurred. These estimates include, but are not limited
to,
ARAC’s historical loss experience and projected loss factors. The required
self-insurance liability is subject to adjustment in the future based upon
changes in the nature of the remaining claims or the ultimate cost. As a
consequence of iDNA’s sale of its automobile rental operations in 1995, iDNA
believes that all incurred claims have been reported to ARAC and that there
are
no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at both October 31, 2007 and January 31, 2007
was $235,000.
Other
Litigation
In
the
normal course of its business, iDNA is periodically named as defendant in legal
proceedings. It is the policy of iDNA to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate. In the
opinion of management, the amount of ultimate liability with respect to any
current actions, if any, is unlikely to materially affect iDNA’s financial
position, results of operations or liquidity.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Segment Information
iDNA’s
operations are comprised of three principal reportable segments: (i) strategic
communications services, (ii) information services and (iii) entertainment.
iDNA
manages each segment separately as a consequence of different marketing, service
requirements and technology strategies for the respective segments.
iDNA
evaluates the performance of its segments and allocates resources based on
revenues and operating income. The table below presents the information about
reportable segments for continuing operations used by iDNA’s chief operating
decision-makers for the three months and nine months ended October 31, 2007
and
2006. Prior financial periods have been conformed to the current presentation
(in thousands):
|
|
|
|
Strategic
|
|
|
|
Undistributed
|
|
|
|
|
|
|
|
Information
|
|
Communications
|
|
|
|
Corporate
|
|
Intersegment
|
|
|
|
|
|
Services
|
|
Services
|
|
Entertainment
|
|
Expenses
|
|
Elimination
|
|
Total
|
|
Three
Months Ended October 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,432
|
|
$
|
2,729
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(91
|
)
|
$
|
5,070
|
|
Operating
income (loss)
|
|
|
47
|
|
|
365
|
|
|
148
|
|
|
(291
|
)
|
|
-
|
|
|
269
|
|
Depreciation
and amortization expense
|
|
|
219
|
|
|
177
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
407
|
|
Capital
expenditures
|
|
|
9
|
|
|
28
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended October
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,457
|
|
$
|
2,350
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(49
|
)
|
$
|
4,758
|
|
Operating
income (loss)
|
|
|
22
|
|
|
157
|
|
|
191
|
|
|
(639
|
)
|
|
-
|
|
|
(269
|
)
|
Depreciation
and amortization expense
|
|
|
230
|
|
|
163
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
410
|
|
Capital
expenditures
|
|
|
119
|
|
|
95
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended October
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,074
|
|
$
|
4,568
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(148
|
)
|
$
|
11,494
|
|
Operating
income (loss)
|
|
|
(469
|
)
|
|
(1,481
|
)
|
|
484
|
|
|
(864
|
)
|
|
-
|
|
|
(2,330
|
)
|
Depreciation
and amortization expense
|
|
|
656
|
|
|
539
|
|
|
-
|
|
|
38
|
|
|
-
|
|
|
1,233
|
|
Capital
expenditures
|
|
|
48
|
|
|
43
|
|
|
-
|
|
|
6
|
|
|
-
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended October
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,309
|
|
$
|
4,512
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(93
|
)
|
$
|
11,728
|
|
Operating
income (loss)
|
|
|
(107
|
)
|
|
(6,080
|
)
|
|
451
|
|
|
(801
|
)
|
|
-
|
|
|
(6,537
|
)
|
Depreciation
and amortization expense
|
|
|
654
|
|
|
503
|
|
|
-
|
|
|
49
|
|
|
-
|
|
|
1,206
|
|
Impairment
charge
|
|
|
-
|
|
|
4,482
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,482
|
|
Capital
expenditures
|
|
|
338
|
|
|
124
|
|
|
-
|
|
|
71
|
|
|
-
|
|
|
533
|
|
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 – Impairment of Long-Lived Assets and Goodwill
Pursuant
to iDNA’s established accounting policies, iDNA conducted its Fiscal 2006 annual
analysis of goodwill as of January 31, 2006. iDNA estimated the fair value
of
its reporting units and compared those values to the carrying values of those
reporting units. If the estimated fair value of the reporting unit had been
less
than the estimated book value, then an impairment would have been deemed to
have
occurred. In estimating the fair value of each reporting unit, iDNA used
primarily the income approach (which utilizes forecasted discounted cash flows
to estimate the fair value of the reporting unit. iDNA concluded that as of
January 31, 2006 there was no impairment of its goodwill based upon the then
estimated fair value of its reporting units.
However,
during the second quarter of Fiscal 2007, as a consequence of declining revenues
and the loss of a client, the results of the operations of the Campus Group
Companies, Inc. (“CGC”) reporting unit raised questions as to whether
projections used at the last valuation date were still valid. Accordingly,
management performed additional impairment tests as of July 31, 2006 for CGC
and
determined that impairment charges were required at that date. Accordingly,
second quarter operations for Fiscal 2007 were charged $2.6 million and $1.9
million for the estimated impairment of CGC’s goodwill and other intangible
assets, respectively. Additionally, iDNA determined it appropriate to reduce
the
useful life of the CGC client relationships intangible asset from 17 years
to 10
years. iDNA will continue to monitor CGC’s operations and will recognize further
impairment charges if and when deemed appropriate.
iDNA
subsequently conducted its Fiscal 2007 annual analysis of goodwill as of January
31, 2007. iDNA concluded that as of January 31, 2007 there were no additional
impairments of its goodwill based upon the then estimated fair value of its
reporting units.
Note
7 – Subsequent Event – iDNA Consummates Loan
Agreement
On
November 21, 2007, iDNA, via its wholly owned subsidiary, iDNA Cinema Holdings,
Inc. (“Holdings”), consummated a Master Loan and Security Agreement (the “Loan
Agreement”) with Silar Advisors, L.P. (“Silar”), as Lender and Administrative,
Payment and Collateral Agent, pursuant to which Silar agreed to provide a term
loan in an aggregate principal amount of $4,250,000 (the “Term Loan”) to
Holdings (the “Term Loan Financing”). Interest is to accrue on the Term Loan at
a per annum rate equal to the variable annual rate of interest designated from
time to time by Citibank N.A. as its “prime rate,” plus 4%, or, if greater,
12.25%, and is payable by Holdings on a quarterly basis. The Term Loan matures
on November 20, 2009 unless extended for one year at the option of Holdings,
upon written notice provided to Silar between fifteen (15) and forty-five (45)
days prior to the Maturity Date, provided that no default is then ongoing and
that Holdings is then in compliance with its financial covenants under the
Loan
Agreement.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Subsequent Event – iDNA Consummates Loan Agreement -
continued
iDNA
has
utilized the proceeds from the Term Loan Financing in the following manners:
(i)
approximately $1.0 million was applied for the repayment and retirement of
iDNA’s indebtedness to Seasons Go Round Inc.; (ii) approximately $260,000 was
used for prepayment of interest on the Term Loan; (iii) approximately $167,000
was paid to Silar or its designee in satisfaction of fees and expenses due
in
connection with the Term Loan Financing; (iv) $60,000 was paid to a consultant
for its role in facilitating the Term Loan Financing; and (v) the remaining
proceeds of approximately $2.7 million have been and will continue to be
utilized for working capital purposes.
iDNA’s
obligations under the Term Loan are secured by a pledge of all of Holdings’
assets, including all of the outstanding shares of National Cinemas, Inc.
(“NCI”), which owns a 50% membership interest in AFC.
The
Term Loan is also guaranteed by (i) iDNA (with such guaranty being secured
by a
pledge of substantially all of iDNA’s assets, other than the shares of its
operating subsidiaries) and (ii) NCI (with such guaranty being secured by a
pledge of substantially all of NCI’s assets, other than its 50% membership
interest in AFC).
In
connection with the Term Loan Financing, as required by the Loan Agreement,
iDNA
also issued to Silar a warrant (the “Warrant”) to purchase 1.5 million shares of
iDNA’s Common Stock at an exercise price of $0.27 per share. The number of
shares issuable upon exercise of the Warrant is subject to customary adjustment
in the event of a stock dividend, stock split, reverse stock split or similar
event and is furthermore subject to a weighted-average antidilution protection
in the event that iDNA issues additional shares of Common Stock for
consideration less than the existing exercise price under the Warrant.
Additionally, pursuant to the Warrant, the holder thereof has been granted
(subject to certain conditions, including the reimbursement of iDNA’s costs)
three demand registration rights for the underlying shares of Common Stock,
as
well as unlimited piggyback registration rights for such shares of Common
Stock.
Item
2.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
General
iDNA,
Inc. (the “Company” or “iDNA”), began operations in 1969 and was incorporated in
Delaware in 1971. As a consequence of iDNA’s consummation of a series of
acquisitions during the past four years, iDNA’s operations are comprised of
three principal reportable segments: (i) strategic communications services,
(ii)
information services and (iii) entertainment. iDNA manages each segment
separately as a consequence of different marketing, service requirements and
technology strategies for the respective segments.
The
strategic communications services segment provides content development via
the
design, development and production of media, collateral material, logistics,
support and/or broadcast services for presentations at corporate and
institutional events, meetings, training seminars and symposiums. The
presentations may be live at single or multi-site venues and can include video
conferencing, satellite broadcasting and webcasting, or the presentations may
be
provided via on-demand access via internet websites, DVD or video
tape.
The
information services segment utilizes custom wireless communication technology
and proprietary software to facilitate client audience interaction,
participation and polling to collect, exchange and/or analyze data and
information in real-time during a meeting or event. The wireless communication
services are available as a turn-key service provided by iDNA during a scheduled
meeting or event or alternatively, a client can purchase from iDNA the required
electronic components and related proprietary software to administer its needs
independently.
As
of
consequence of iDNA’s investment in the Angelika Film Centers, LLC (“AFC”), iDNA
operates in the movie exhibition and entertainment industry.
Critical
Accounting Policies
iDNA’s
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, which require iDNA to make estimates and
assumptions. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and
the reported revenues and expenses of iDNA. iDNA’s significant accounting
policies are described in Note 1 of Notes to Condensed Consolidated Financial
Statements included under Item 1 of this Part I (hereinafter, the “Notes”).
However, certain accounting policies are deemed “critical”, as they require
management’s highest degree of judgment, estimates and assumptions. These
accounting estimates and disclosures have been discussed with the Audit
Committee of iDNA’s Board of Directors. A discussion of iDNA’s critical
accounting policies, the judgments and uncertainties affecting their application
and the likelihood that materially different amounts would be reported under
different conditions or using different assumptions are as follows:
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Revenues:
iDNA’s
revenues are earned within short time periods, generally less than one week.
iDNA recognizes revenue from its strategic communications segment, including
the
video production, video editing, meeting services and broadcast satellite or
webcast services, and its information services segment when the services are
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. iDNA does not have licensing or other arrangements that result
in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts
are
deferred until the sale and delivery are complete. Deferred production costs
of
$171,000 and $115,000, respectively, are reported as other current assets at
October 31, 2007 and January 31, 2007.
iDNA
recognizes revenue from the sale of electronic equipment, proprietary software
and related components at the time of shipment. Deposits and other prepayments
received prior to shipment are recorded as deferred revenue until the electronic
equipment and related software are shipped. iDNA has licensing and technical
support arrangements for future software enhancements and upgrades for technical
support for previously delivered electronic equipment. Revenues derived from
licensing and technical support are recognized over the term of the licensing
and technical support period, which generally are sold in increments of one
year
of coverage. For the three months ended October 31, 2007 and 2006, electronic
equipment sales were $560,000 and $708,000, respectively. For the nine months
ended October 31, 2007 and 2006, electronic equipment sales were $1.6 million
and $2.0 million, respectively.
Cost
of Revenues:
Cost of
revenues consists of direct expenses specifically associated with client service
revenues. The cost of revenues includes direct salaries and benefits, purchased
products or services for clients, web hosting, support services, shipping and
delivery costs.
Accounts
Receivable:
iDNA
extends credit to clients in the normal course of business. iDNA continuously
monitors collections and payments from clients and maintains an allowance for
doubtful accounts based upon historical experience and any specific client
collection issues that have been identified. Since accounts receivable are
concentrated in a relatively few number of clients, a significant change in
the
liquidity or financial position of any of these clients could have a material
adverse impact on the collectibility of the accounts receivable and future
operating results. iDNA
does
not have any off-balance sheet credit exposure related to its
customers.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Valuation
of Long-lived Assets and Goodwill:
iDNA
reviews the carrying value of its long-lived assets (other than goodwill)
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. When indicators of impairment exist, iDNA determines
whether the estimated undiscounted sum of the future cash flows from such assets
is less than their carrying amounts. If less, an impairment loss is recognized
in the amount, if any, by which the carrying amount of such assets exceeds
their
respective fair values. The determination of fair value is based on quoted
market prices in active markets, if available, or independent appraisals; sales
price negotiations; or projected future cash flows discounted at a rate
determined by management to be commensurate with iDNA’s business risk. The
estimation of fair value utilizing discounted forecasted cash flows includes
significant judgments regarding assumptions of revenue, operating and marketing
costs; selling and administrative expenses; interest rates; property and
equipment additions and retirements; industry competition; and general economic
and business conditions, among other factors.
Pursuant
to iDNA’s established accounting policies, iDNA conducted its Fiscal 2006 annual
analysis of goodwill as of January 31, 2006. iDNA estimated the fair value
of
its reporting units and compared those values to the carrying values of those
reporting units. If the estimated fair value of the reporting unit had been
less
than the estimated book value, then an impairment would have been deemed to
have
occurred. In estimating the fair value of each reporting unit, iDNA used
primarily the income approach (which utilizes forecasted discounted cash flows
to estimate the fair value of the reporting unit. iDNA concluded that as of
January 31, 2006 there was no impairment of its goodwill based upon the then
estimated fair value of its reporting units.
However,
during the second quarter of Fiscal 2007, as a consequence of declining revenues
and the loss of a client, the results of the operations of the Campus Group
Companies, Inc. (“CGC”) reporting unit raised questions as to whether
projections used at the last valuation date were still valid. Accordingly,
management performed additional impairment tests as of July 31, 2006 for CGC
and
determined that impairment charges were required at that date. Accordingly,
second quarter operations for Fiscal 2007 were charged $2.6 million and $1.9
million for the estimated impairment of CGC’s goodwill and other intangible
assets, respectively. Additionally, iDNA determined it appropriate to reduce
the
useful life of the CGC client relationships intangible asset from 17 years
to 10
years. iDNA will continue to monitor CGC’s operations and will recognize further
impairment charges if and when deemed appropriate.
iDNA
conducted its Fiscal 2007 annual analysis of goodwill as of January 31, 2007.
iDNA concluded that as of January 31, 2007 there were no additional impairments
of its goodwill based upon the then estimated fair value of its reporting units.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Self-Insurance
Claims:
iDNA’s
wholly-owned subsidiary ARAC, Inc. (“ARAC”) maintained and continues to maintain
self-insurance for claims and associated litigation expenses relating to bodily
injury or property damage from accidents involving the vehicles rented to
customers by its discontinued automobile rental operations occurring in Fiscal
1996 and prior. ARAC was, when required by either governing state law or the
terms of its rental agreement, self-insured for the first $1.0 million per
occurrence, and for losses in excess of $5.0 million per occurrence, for bodily
injury and property damage resulting from accidents involving its rental
vehicles. ARAC was also self-insured, up to certain retained limits, for bodily
injury and property damage resulting from accidents involving ARAC vehicles
operated by employees within the scope of their employment.
ARAC
is
the subject to certain self-insurance claims and associated litigation expenses
relating to its discontinued automobile rental operations. iDNA’s management
estimates the required self-insurance liability based upon specific
identification of the known matters subject to future claims, the nature of
the
claim and the estimated costs to be incurred. These estimates include, but
are
not limited to, ARAC’s historical loss experience and projected loss factors.
The required self-insurance liability is subject to adjustment in the future
based upon changes in the nature of the remaining claims or the ultimate cost.
As a consequence of iDNA’s sale of its automobile rental operations in 1995,
iDNA believes that all incurred claims have been reported to ARAC and that
there
are no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at October 31, 2007 and January 31, 2007 was
$235,000 and $235,000, respectively.
Because
of the uncertainties related to several residual small claims and legal
proceedings involving iDNA’s former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect that the
adjudication or settlement of these matters will have on iDNA. As additional
information regarding iDNA’s potential liabilities becomes available, iDNA will
revise its estimates as appropriate.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Stock-Based
Compensation:
Effective February 1, 2006, iDNA adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based
Payment
(“SFAS
No. 123(R)”), which replaced SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”), and superseded APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) requires all share-based payments to employees, including grants
of
employee stock options, to be recognized in the financial statements based
on
their fair values beginning with the first interim or annual period after
December 15, 2005. iDNA elected the prospective method of adopting SFAS No.
123(R) which requires that compensation expense be recorded over the remaining
periods for what would have been the remaining fair value under SFAS No. 123
of
all unvested stock options and restricted stock at the beginning of the first
quarter of adoption. The compensation costs for that portion of awards is based
on the grant-date fair value of the awards as calculated for pro forma
disclosures under SFAS No. 123. iDNA charged to operations $60,000 and $60,000,
respectively, for share-based compensation for the three months ended October
31, 2007 and 2006. iDNA charged to operations $211,000 and $200,000,
respectively, for share-based compensation for the nine months ended October
31,
2007 and 2006.
Income
Taxes:
iDNA
recognizes deferred tax assets and liabilities based on differences between
the
financial statement carrying amounts and the tax basis of assets and
liabilities. Loss carrybacks, reversal of deferred tax liabilities, tax planning
and estimates of future taxable income are considered in assessing the need
for
a valuation allowance. At the time it is determined that iDNA will more likely
than not be able to realize deferred tax assets in excess of the recorded
amount, net of its valuation allowance, an adjustment to reduce the valuation
allowance would be recorded that would increase income in the period such
determination was made. Likewise, should management determine that iDNA would
not be able to realize all or part of net deferred tax assets generated in
the
future, an increase to the valuation allowance would be charged to and reduce
income in the period such determination was made.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Financial
Condition and Results of Operations
Results
from Operations for the Three Months Ended October 31,
2007
as
Compared to the Three Months Ended October 31, 2006
The
following table sets forth for the three months ended October 31, 2007 and
2006
certain statements of operations data by segment obtained from iDNA’s
consolidated statement of operations (in thousands). All figures described
in
the ensuing discussion (as derived from the table) are stated in approximate
amounts, based upon rounding of figures presented in the table.
|
|
Information Services
Three Months Ended
October 31,
|
|
Strategic
Communications Services
Three Months Ended
October 31,
|
|
Intersegment Elimination
Three Months Ended
October 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,432
|
|
$
|
2,457
|
|
$
|
2,729
|
|
$
|
2,350
|
|
$
|
(91
|
)
|
$
|
(49
|
)
|
Cost
of revenues
|
|
|
1,325
|
|
|
1,523
|
|
|
1,267
|
|
|
1,080
|
|
|
(91
|
)
|
|
(49
|
)
|
Selling,
general and administrative expenses
|
|
|
1,060
|
|
|
912
|
|
|
1,097
|
|
|
1,112
|
|
|
-
|
|
|
-
|
|
Operating
income (loss)
|
|
|
47
|
|
|
22
|
|
|
365
|
|
|
157
|
|
|
-
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
219
|
|
|
230
|
|
|
177
|
|
|
163
|
|
|
-
|
|
|
-
|
|
|
|
Entertainment
Three Months Ended
October 31,
|
|
Undistributed
Corporate Expenses
Three Months Ended
October 31,
|
|
Consolidated
Three Months Ended
October 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,070
|
|
$
|
4,758
|
|
Cost
of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,501
|
|
|
2,554
|
|
Selling,
general and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
233
|
|
|
428
|
|
|
2,390
|
|
|
2,452
|
|
Operating
income (loss)
|
|
|
148
|
|
|
191
|
|
|
(291
|
)
|
|
(639
|
)
|
|
269
|
|
|
(269
|
)
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
17
|
|
|
407
|
|
|
410
|
|
Revenues:
Revenues
increased 6.6% to $5.1 million for the three months ended October 31, 2007
as
compared to $4.8 million for the three months ended October 31, 2006.
Revenues
attributed to the information services segment decreased $25,000 to $2.4 million
for the three months ended October 31, 2007 as compared to $2.5 million for
the
three months ended October 31, 2006. The decrease in revenues was principally
due to the net effect of (i) a decline in electronic equipment sales of
$148,000, offset by, (ii) an increase of $123,000 as a consequence of changes
in
the timing and/or scope of the projects completed during the three months ended
October 31, 2007 as compared to the three months ended October 31, 2006.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Revenues
attributed to the strategic communications services segment increased $379,000
to $2.7 million for the three months ended October 31, 2007 as compared to
$2.3
million for the three months ended October 31, 2006. The increase in revenues
was principally due to an increase in the scope and size of and a change of
timing for projects completed during the three months ended October 31, 2007
as
compared to the three months ended October 31, 2006. Although
the scope of projects completed during the three months ended October 31, 2007
increased, deferred revenue increased by $882,000 from January 31, 2007 as
a
consequence of an increase of the revenue value of projects scheduled for
completion during the fourth quarter of Fiscal 2008 and the first quarter of
Fiscal 2009.
The
nature of iDNA’s business is such that the nature and timing of assignments
completed for clients, and the resulting revenue, will vary from period to
period in terms of scope, size of projects and the ultimate revenues derived.
The timing and fluctuations between periods for assignments is particularly
apparent for our strategic communications segment where assignments tend to
be
fewer in number but larger in scope than the information services segment.
As a
consequence, revenues tend to fluctuate from quarter-to-quarter based upon
the
client determined timing for completion of an assignment.
iDNA
recently consolidated its previously decentralized marketing for strategic
communications services in an effort to improve the coordination and program
value for current and prospective clients. Each of iDNA’s senior marketing
strategists develops new marketing initiatives, creates new project
opportunities, seeks new clients for its services and expands existing client
relationships to generate new revenues to reduce period to period fluctuations.
Although no assurances can be made, iDNA continues to seek revenue expansion
through its new marketing strategists’ initiatives as a means to reduce
year-to-year and quarter-to-quarter fluctuations in its revenues as well as
to
ultimately increase revenues. Generally, there is a six to twelve month
investment period in new client initiatives and relationships before iDNA
expects to realize revenues in the form of new projects and/or clients.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
Cost
of Service Revenues:
Cost of
revenues for the three months ended October 31, 2007 and 2006 was $2.5 million
and $2.6 million, respectively.
Cost
of
revenues attributed to the information services segment was $1.3 million for
the
three months ended October 31, 2007 as compared to $1.5 million for the three
months ended October 31, 2006.
The
gross
profit realized by the information services segment for the three months ended
October 31, 2007 and 2006 was $1.1 million and $934,000, respectively. The
gross
profit increase of $173,000 for the three months ended October 31, 2007 as
compared to the three months ended October 31, 2006 is due principally to (i)
an
increase in project margins for the period and (ii) a decrease of $33,000 in
project overhead costs. The gross margin for the three months ended October
31,
2007 increased 7.5% to 45.5% as compared to 38.0% for the three months ended
October 31, 2006, principally due to (i) a decrease in direct project costs
of
4.5% that resulted in higher project margins and (ii) a decrease of 3.0% in
indirect production overhead expenses as a percentage of revenues.
Cost
of
revenues attributable to the strategic communications segment increased $187,000
to $1.3 million for the three months ended October 31, 2007 as compared to
$1.1
million for the three months ended October 31, 2006. The increase in the costs
of revenues was principally due to a increase in direct project costs as a
consequence of the $379,000 increase in revenues for the three months ended
October 31, 2007 as compared to the three months ended October 31, 2006. The
gross profit realized by the strategic communications segment for the three
months ended October 31, 2007 and 2006 was $1.5 million and $1.3 million,
respectively. The gross profit increase of $192,000 for the three months ended
October 31, 2007 as compared the three months ended October 31, 2006 was
principally due to the increase of revenues. The nature of the strategic
communications segment’s cost of revenues includes various fixed production,
operating and personnel costs as well as variable direct project costs. As
a
consequence, the absorption of the fixed production operating and personnel
costs can cause quarter-to-quarter fluctuations in gross profit realized as
iDNA
experiences quarter-to-quarter fluctuations in revenues.
Selling,
General and Administrative (“SG&A”):
SG&A for the three months ended October 31, 2007 and the three months ended
October 31, 2006 was $2.4 million and $2.5 million, respectively.
SG&A
attributed to the information services segment was $1.1 million and $912,000,
respectively, for three months ended October 31, 2007 and the three months
ended
October 31, 2006. The net increase in information services SG&A was $148,000
for the three months ended October 31, 2007 as compared to the three months
ended October 31, 2006. The net increase in SG&A was due principally to an
increase in personnel and selling expenses.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations – continued
SG&A
attributable to the strategic communications services segment decreased $15,000
to $1.1 million for the three months ended October 31, 2007 as compared to
$1.1
million for the three months ended October 31, 2006.
SG&A
for undistributed corporate expenses for the three months ended October 31,
2007
and October 31, 2006 was $233,000 and $428,000, respectively. The corporate
expenses incurred by iDNA relate principally to expenses incurred at its
executive offices for executive and corporate finance personnel, certain
employee benefits, professional services such as consulting, legal and
accounting fees, corporate insurance, corporate marketing initiatives and the
costs associated with maintaining its New York facility. iDNA allocates to
its
various business segments or units the proportionate share of corporate expenses
that directly relate to and/or benefit such business segment or unit. The
undistributed corporate expenses reflect the remaining expenses incurred but
not
directly attributable to a business segment or unit. The decrease in corporate
SG&A of $195,000 for the three months ended October 31, 2007 as compared to
the three months ended October 31, 2006 was due principally to (i) a net
decrease in personnel and related benefit expenses, (ii) lower professional
fees
from company advisors and (iii) the reduction in facility rent and related
occupancy costs as iDNA consolidated its New York City-based strategic
communications operations into one facility.
Income
from AFC Investment:
iDNA
accounts for its investment in AFC using the equity method. For the three months
ended October 31, 2007 and October 31, 2006, iDNA recorded income of $148,000
and $191,000, respectively, representing iDNA’s share of AFC’s net income.
Summarized
income statement data for AFC for the three months ended September 30, 2007
and
2006, respectively, is as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,408
|
|
$
|
1,646
|
|
|
|
|
|
|
|
|
|
Film
rental
|
|
|
287
|
|
|
406
|
|
Operating
costs
|
|
|
608
|
|
|
635
|
|
Depreciation
and amortization
|
|
|
195
|
|
|
195
|
|
General
and administrative expenses
|
|
|
22
|
|
|
28
|
|
|
|
|
1,112
|
|
|
1,264
|
|
Net
income
|
|
$
|
296
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income
|
|
$
|
148
|
|
$
|
191
|
|
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
AFC’s
revenues decreased $238,000 for the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006, principally as a result
of the net effects of (i) a decrease of 18.4% in attendance period-to-period,
(ii) a decrease of $16,000 in other, concession and café revenues, offset by,
(iii) a 1.7% increase in average ticket prices. The attendance, and at times
the
ticket prices, at AFC will vary depending on audience interest in, and the
popularity of the films it exhibits and other factors. Film rental expense,
as a
percentage of revenue, decreased 4.3% to 20.4% from 24.7% for the three months
ended September 30, 2007 and 2006, respectively. Film rental expense generally
is a factor of a fixed percentage rental rate per film multiplied by the number
of tickets sold. AFC experiences fluctuations in film rental expense, as a
percentage of revenue, depending upon the rental rate per film and the
popularity of the film. Operating costs, as a percentage of revenue, increased
4.6% to 43.2% for the three months ended September 30, 2007, as compared to
38.6% for the three months ended September 30, 2006 due principally to decreased
revenues for the three months ended September 30, 2007 as compared to the three
months ended September 30, 2006. The nature of AFC’s operating costs tend
generally to be more fixed overhead-related costs and advertising expenses.
Interest
Expense:
For the
three months ended October 31, 2007 and 2006, iDNA incurred interest expense
of
$59,000 and $216,000, respectively. The decrease of $157,000 in interest expense
for the three month period ended October 31, 2007 as compared to the three
month
period ended October 31, 2006 is due principally to the suspension of interest
attributable to the Base Notes, Trailing Notes and Convertible Note (each
defined below) (collectively, the “Campus Notes”) for the period February 1,
2007 through October 31, 2007.
The
aggregate carrying value of the Campus Notes outstanding during the interest
suspension period was $12.1 million and the value of the foregone interest
for
the three months ended October 31, 2007 was $155,000. The Campus Notes issued
by
iDNA to acquire Audience Response Systems, Inc. and the Campus Group Companies,
Inc. (collectively, the “Campus Group”) bear interest at 5% per annum and are
repayable in quarterly installments according to a formula based upon the future
cash flows realized from the Campus Group. For the trailing twelve month period
ended October 31, 2007, the Campus Group’s financial performance fell below
certain minimum operating cash flow thresholds established pursuant to the
terms
of the Campus Notes. As a consequence no interest was incurred on the Campus
Notes during the period February 1, 2007 through October 31, 2007.
Prospectively, interest may accrue pursuant to the terms of the Campus
Notes.
Income
Taxes:
Due to
net operating losses and the availability of net operating loss carryforwards,
iDNA’s effective federal income tax rate was zero for the three month periods
ended October 31, 2007 and October 31, 2006. iDNA has provided a full valuation
allowance against its net operating loss carryforward and other net deferred
tax
asset items due to the uncertainty of their future realization.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Financial
Condition and Results of Operations
Results
from Operations for the Nine Months Ended October
31,
2007
as
Compared to the Nine Months Ended October 31, 2006
The
following table sets forth for the nine months ended October 31, 2007 and 2006
certain statements of operations data by segment obtained from iDNA’s
consolidated statement of operations (in thousands). All figures described
in
the ensuing discussion (as derived from the table) are stated in approximate
amounts, based upon rounding of figures presented in the table.
|
|
|
|
Strategic
|
|
|
|
|
|
Information
Services
|
|
Communications
Services
|
|
Intersegment
Elimination
|
|
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
31,
|
|
October
31,
|
|
October
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,074
|
|
$
|
7,309
|
|
$
|
4,568
|
|
$
|
4,512
|
|
$
|
(148
|
)
|
$
|
(93
|
)
|
Cost
of revenues
|
|
|
4,108
|
|
|
4,173
|
|
|
3,107
|
|
|
2,849
|
|
|
(148
|
)
|
|
(93
|
)
|
Selling,
general and administrative expenses
|
|
|
3,428
|
|
|
3,243
|
|
|
2,942
|
|
|
3,260
|
|
|
-
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(469
|
)
|
|
(107
|
)
|
|
(1,481
|
)
|
|
(6,080
|
)
|
|
-
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
656
|
|
|
654
|
|
|
539
|
|
|
503
|
|
|
-
|
|
|
-
|
|
Impairment
charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,482
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Undistributed
|
|
|
|
|
|
Entertainment
|
|
Corporate
Expenses
|
|
Consolidated
|
|
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October
31,
|
|
October
31,
|
|
October
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
11,494
|
|
$
|
11,728
|
|
Cost
of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,067
|
|
|
6,929
|
|
Selling,
general and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
703
|
|
|
864
|
|
|
7,073
|
|
|
7,367
|
|
Operating
income (loss)
|
|
|
484
|
|
|
451
|
|
|
(864
|
)
|
|
(801
|
)
|
|
(2,330
|
)
|
|
(6,537
|
)
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
-
|
|
|
38
|
|
|
49
|
|
|
1,233
|
|
|
1,206
|
|
Impairment
charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,482
|
|
Revenues:
Revenues
decreased 2.0% to $11.5 million for the nine months ended October 31, 2007
as
compared to $11.7 million for the nine months ended October 31, 2006.
Revenues
attributed to the information services segment decreased $235,000 to $7.1
million for the nine months ended October 31, 2007 as compared to $7.3 million
for the nine months ended October 31, 2006. The decrease in revenues was
principally due to changes in the timing and/or scope of the projects completed
during the nine months ended October 31, 2007 as compared to the nine months
ended October 31, 2006.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Revenues
attributed to the strategic communications services segment increased $56,000
to
$4.6 million for the nine months ended October 31, 2007 as compared to $4.5
million for the nine months ended October 31, 2006. The increase in revenues
was
principally due to an increase in the scope and size of and a change in the
timing for projects completed during the nine months ended October 31, 2007
as
compared to the nine months ended October 31, 2006. In addition to the change
in
the scope of projects completed during the nine months ended October 31, 2007,
deferred revenue increased by $882,000 from January 31, 2007 as a consequence
of
an increase of the revenue value of projects scheduled for completion during
the
fourth quarter of Fiscal 2008 and the first quarter of Fiscal 2009.
The
nature of iDNA’s business is such that the nature and timing of assignments
completed for clients, and the resulting revenue, will vary from period to
period in terms of scope, size of projects and the ultimate revenues derived.
The timing and fluctuations between periods for assignments is particularly
apparent for our strategic communications segment where assignments tend to
be
fewer in number but larger in scope than the information services segment.
As a
consequence, revenues tend to fluctuate from quarter-to-quarter based upon
the
client determined timing for completion of an assignment.
iDNA
recently consolidated its previously decentralized marketing for strategic
communications services in an effort to improve the coordination and program
value for current and prospective clients. Each of iDNA’s senior marketing
strategists develops new marketing initiatives, creates new project
opportunities, seeks new clients for its services and expands existing client
relationships to generate new revenues to reduce period to period fluctuations.
Although no assurances can be made, iDNA continues to seek revenue expansion
through its new marketing strategists’ initiatives as a means to reduce
year-to-year and quarter-to-quarter fluctuations in its revenues as well as
to
ultimately increase revenues. Generally, there is a six to twelve month
investment period in new client initiatives and relationships before iDNA
expects to realize revenues in the form of new projects and/or clients.
Cost
of Service Revenues:
Cost of
revenues for the nine months ended October 31, 2007 and 2006 was $7.1 million
and $6.9 million, respectively.
Cost
of
revenues attributed to the information services segment was $4.1 million for
the
nine months ended October 31, 2007 as compared to $4.2 million for the nine
months ended October 31, 2006.
The
gross
profit realized by the information services segment for the nine months ended
October 31, 2007 and 2006 was $3.0 million and $3.1 million, respectively.
The
gross profit decrease of $170,000 for the nine months ended October 31, 2007
as
compared to the nine months ended October 31, 2006 was due principally to (i)
a
decline in revenues of $235,000 and (ii) a reduction in project margins for
the
period. The gross margin for the nine months ended October 31, 2007 decreased
1.0% to 41.9% as compared to 42.9% for the nine months ended October 31, 2006,
principally due to an increase in direct project costs.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Cost
of
revenues attributable to the strategic communications segment increased $258,000
to $3.1 million for the nine months ended October 31, 2007 as compared to $2.8
million for the nine months ended October 31, 2006. The gross profit decrease
of
$202,000 for the nine months ended October 31, 2007 as compared the nine months
ended October 31, 2006 was principally due to an increase in direct project
costs as a consequence of the completion of smaller, lower margin projects
during the period and in increase in production costs. The nature of the
strategic communications segment’s cost of revenues includes various fixed
production, operating and personnel costs as well as variable direct project
costs. As a consequence, the absorption of the fixed production operating and
personnel costs can cause quarter-to-quarter fluctuations in gross profit
realized as iDNA experiences quarter-to-quarter fluctuations in revenues.
Selling,
General and Administrative (“SG&A”):
SG&A for the nine months ended October 31, 2007 and the nine months ended
October 31, 2006 was $7.1 million and $7.4 million, respectively.
SG&A
attributed to the information services segment was $3.4 million and $3.2
million, respectively, for the nine months ended October 31, 2007 and the nine
months ended October 31, 2006. The net increase in information services SG&A
was $185,000 for the nine months ended October 31, 2007 as compared to the
nine
months ended October 31, 2006. The net increase in SG&A was due principally
to an increase in personnel and selling expenses.
SG&A
attributable to the strategic communications services segment decreased $318,000
to $2.9 million for nine months ended October 31, 2007 as compared to $3.3
million for the nine months ended October 31, 2006. The decrease in SG&A was
principally due to (i) a net decrease in personnel and related benefit expenses,
(ii) a decrease in professional services and consulting expenses and (iii)
the
reduction in facility rent and related occupancy costs as iDNA consolidated
its
New York City-based strategic communications operations into one
facility.
SG&A
for undistributed corporate expenses for the nine months ended October 31,
2007
and October 31, 2006 was $703,000 and $864,000, respectively. The corporate
expenses incurred by iDNA relate principally to expenses incurred at its
executive offices for executive and corporate finance personnel, certain
employee benefits, professional services such as consulting, legal and
accounting fees, corporate insurance, corporate marketing initiatives and the
costs associated with maintaining its New York facility. iDNA allocates to
its
various business segments or units the proportionate share of corporate expenses
that directly relate to and/or benefit such business segment or unit. The
undistributed corporate expenses reflect the remaining expenses incurred but
not
directly attributable to a business segment or unit. The decrease in corporate
SG&A of $161,000 for the nine months ended October 31, 2007 as compared to
the nine months ended October 31, 2006 was due principally to (i) a net decrease
in personnel and related benefit expenses, (ii) lower professional fees from
company advisors and (iii) the reduction in facility rent and related occupancy
costs as iDNA consolidated its New York City-based strategic communications
operations into one facility.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Income
from AFC Investment:
iDNA
accounts for its investment in AFC using the equity method. For the nine months
ended October 31, 2007 and October 31, 2006, iDNA recorded income of $484,000
and $451,000, respectively, representing iDNA’s share of AFC’s net income.
Summarized
income statement data for AFC for the nine months ended September 30, 2007
and
2006, respectively, is as follows (in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,696
|
|
$
|
4,575
|
|
|
|
|
|
|
|
|
|
Film
rental
|
|
|
1,144
|
|
|
1,219
|
|
Operating
costs
|
|
|
1,909
|
|
|
1,809
|
|
Depreciation
and amortization
|
|
|
585
|
|
|
532
|
|
General
and administrative expenses
|
|
|
90
|
|
|
113
|
|
|
|
|
3,728
|
|
|
3,673
|
|
Net
income
|
|
$
|
968
|
|
$
|
902
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income
|
|
$
|
484
|
|
$
|
451
|
|
AFC’s
revenues increased $121,000 for the nine months ended September
30, 2007
as compared to the nine months ended September 30, 2006, principally as a result
of the net effects of (i) an increase of 2.2% in attendance period-to-period,
(ii) a 1.7% increase in average ticket prices, offset by, (iii) a decrease
of
$32,000 in other, concession and café revenues. The attendance, and at times the
ticket prices, at AFC will vary depending on audience interest in, and the
popularity of the films it exhibits and other factors. Film rental expense,
as a
percentage of revenue, decreased 2.2% to 24.4% from 26.6% for the nine months
ended September 30, 2007 and 2006, respectively. Film rental expense generally
is a factor of a fixed percentage rental rate per film multiplied by the number
of tickets sold. AFC experiences fluctuations in film rental expense, as a
percentage of revenue, depending upon the rental rate per film and the
popularity of the film. Operating costs, as a percentage of revenue, increased
1.1% to 40.6% for the nine months ended September 30, 2007, as compared to
39.5%
for the nine months ended September 30, 2006 due principally to the net effect
of (i) increased revenues, offset by, (ii) an increase in operating costs,
principally for rent, professional fees and depreciation, for the nine months
ended September 30, 2007 as compared to the nine months ended September 30,
2006. The nature of AFC’s operating costs tend generally to be more fixed
overhead-related costs and advertising expenses.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Interest
Expense:
For the
nine months ended October 31, 2007 and 2006, iDNA incurred interest expense
of
$172,000 and $579,000, respectively. The decrease of $407,000 in interest
expense for the nine month period ended October 31, 2007 as compared to the
nine
month period ended October 31, 2006 was due principally to the net effects
of
(i) the suspension of interest attributable to the Campus Notes for the period
February 1, 2007 through October 31, 2007, offset by, (ii) an increase of
$77,000 in interest expense relating to a $1.0 million promissory note issued
in
July 2006.
The
aggregate principal amount of the Campus Notes outstanding during the interest
suspension period was $12.1 million and the value of the foregone interest
for
the nine months ended October 31, 2007 was $461,000. The Campus Notes issued
by
iDNA to acquire the Campus Group bear interest at 5% per annum and are repayable
in quarterly installments according to a formula based upon the future cash
flows realized from the Campus Group. For the trailing twelve month period
ended
October 31, 2007, the Campus Group’s financial performance fell below certain
minimum operating cash flow thresholds established pursuant to the terms of
the
Campus Notes. As a consequence no interest was incurred on the Campus Notes
during the period February 1, 2007 through October 31, 2007. Prospectively,
interest may accrue pursuant to the terms of the Campus Notes.
Interest
expense abatement:
The
Campus Notes bear interest at 5% per annum and are repayable in quarterly
installments according to a formula based upon the future cash flows realized
from The Campus Group. For the trailing twelve month period ended July 31,
2006,
The Campus Group’s financial performance had fallen below certain minimum
operating cash flow thresholds established pursuant to the terms of the Campus
Notes. As a consequence, the interest expense incurred by iDNA during the twelve
month period ended July 31, 2006 was abated. As a consequence of the interest
abatement, iDNA realized a gain from the abatement of interest on the Campus
Notes of $631,000 for the nine months ended October 31, 2006.
Income
Taxes:
Due to
net operating losses and the availability of net operating loss carryforwards,
iDNA’s effective federal income tax rate was zero for the nine month periods
ended October 31, 2007 and October 31, 2006. iDNA has provided a full valuation
allowance against its net operating loss carryforward and other net deferred
tax
asset items due to the uncertainty of their future realization.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Liquidity
and Capital Resources
As
a
consequence of periodic fluctuations in iDNA’s working capital needs based upon
the timing of collections, distributions from AFC, and periods of increased
production activity, on July 20, 2006, iDNA consummated a Loan and Security
Agreement (“Loan Agreement”) with a lender and issued a Promissory Note (the
“Note”) in a principal amount of $1.0 million. The lender, Seasons Go Round, is
an unaffiliated third party lender. Pursuant to the terms of the Note, (i)
the
outstanding principal amount owed under the Note is due February 15, 2008,
(ii)
iDNA is required to pay interest only, monthly and in arrears, during the term
of the Note and (iii) the Note bears interest at fourteen percent (14%) per
annum. iDNA may prepay the Note at any time and without a prepayment penalty.
iDNA’s obligations under the Note are secured by a perfected
first
priority security interest in and to, and a lien on and pledge of, iDNA’s right,
title and interest in and to virtually all of iDNA’s assets. The lien does not
extend to the common stock or membership interests of certain subsidiaries
- the
Campus Group and Option Technologies Interactive, LLC. (“OTI”). The Note was
repaid and retired on November 21, 2007 as a consequence of iDNA’s then
consummated Master Loan and Security Agreement with a lender in the principal
amount of $4.25 million (see further discussion below).
As
a
consequence of iDNA’s acquisition of OTI effective November 18, 2005, iDNA
issued to Flexner Wheatley & Associates (“FWA”) and MeetingNet Interactive,
Inc. (“MeetingNet”) promissory notes in an aggregate principal amount of $1.5
million (the “OTI Promissory Notes”). The OTI Promissory Notes bear interest at
5% per annum and are repayable in quarterly installments according to a formula
based upon the future cash flows realized from OTI’s operations. iDNA’s
obligations under the OTI Promissory Notes are secured by the membership
interests of OTI. At October 31, 2007, iDNA had outstanding principal
obligations under the terms of the OTI Promissory Notes of $1.0 million and
accrued interest of $13,000.
As
a
consequence of iDNA’s acquisition of The Campus Group effective July 31, 2003,
iDNA issued to Mr. Steve Campus and certain family trusts promissory notes
in an
aggregate principal amount of $9.9 million and a convertible promissory note
in
the principal amount of $2.8 million (collectively, the “Campus Notes”). Of the
$9.9 million in promissory notes issued by iDNA, $6.6 million of the promissory
notes (“Base Notes”) bear interest at 5% per annum and are repayable in
quarterly installments according to a formula based upon the future cash flows
realized from The Campus Group over a period not to exceed seven years. The
remaining $3.3 million in promissory notes (“Trailing Notes”) issued by iDNA
bear interest at 5% per annum and are repayable in quarterly installments,
commencing upon the retirement of the Base Notes, according to a formula based
upon the future cash flows realized from The Campus Group over a period not
to
exceed three years subsequent to the retirement of the Base Notes. The $2.8
million convertible promissory note (“Convertible Note”) (i) bears interest at
5% per annum, payable quarterly in cash or accumulating as principal at the
election of iDNA, (ii) requires principal payments to commence upon the
retirement of the Base Notes and Trailing Notes and is then repayable in
quarterly installments according to a formula based upon the future cash flows
realized from The Campus Group over a period not to exceed three years and
(iii)
is convertible at the option of the holder into shares of iDNA’s Common Stock at
a base conversion price of $1.50 per share. The holder may not convert the
Convertible Note into iDNA’s Common Stock prior to repayment of the Base Notes
and Trailing Notes. iDNA’s obligations under the Campus Notes are secured by the
capital stock of the companies comprising The Campus Group. At October 31,
2007,
iDNA had outstanding principal obligations under the terms of the Base Notes,
Trailing Notes and the Convertible Note of $6.0 million, $3.3 million and $2.8
million, respectively, and accrued interest of $156,000.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
For
the
trailing twelve month period ended July 31, 2006, The Campus Group’s financial
performance fell below certain minimum operating cash flow thresholds
established pursuant to the terms of the Campus Notes. As a consequence, the
interest expense incurred by iDNA during the twelve month period ended July
31,
2006 was abated. As a consequence of the interest abatement on the Campus Notes,
iDNA realized a gain of $631,000 during the second quarter of Fiscal 2007.
For
the trailing twelve month period ended October 31, 2007, the Campus Group’s
financial performance remained below the minimum operating cash flow thresholds.
As a consequence no interest was incurred on the Campus Notes during the period
February 1, 2007 through October 31, 2007. Prospectively, interest may accrue
pursuant to the terms of the Campus Notes.
As
a
consequence of iDNA’s acquisition of OMI Business Communications, Inc. (“OMI”)
effective April 1, 2003, iDNA assumed a $402,000 loan guaranteed by the U.S.
Small Business Administration (the “SBA Loan”). At October 31, 2007, the
remaining balance of the SBA Loan of $307,000 is repayable in monthly
installments of $3,309 with the last payment due in April 2017. The SBA Loan
bears interest at the rate of 4% per annum. OMI’s obligation under the SBA Loan
is collateralized by substantially all of OMI’s assets and payment thereunder is
subject to the personal guarantee of Mr. Dean Thompson, President of OMI.
In
September 2006, OMI consummated equipment financing in the form of a capital
lease with a financing institution to acquire $102,000 in various digital media
production and editing equipment. The capital lease is payable in monthly
installments with the last payment due in July 2009 and bears an implied
interest rate of 10%. OMI’s obligation under the capital lease is collateralized
by the digital media production and editing equipment acquired by OMI. At
October 31, 2007, the remaining balance due under the capital lease was
$61,000.
For
the
nine months ended October 31, 2007, iDNA’s cash and cash equivalents decreased
$257,000 due principally to the net effects of (i) proceeds from AFC
distributions of $750,000, (ii) proceeds from the exercise of stock options
of
$14,000, offset by (iii) cash flows used in operations of $745,000, (iv) capital
expenditures of $97,000, and (v) the repayment of debt of $179,000.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Prior
to
of its entry into the Loan Agreement (defined below), iDNA had no external
source of financing and had operated on its existing cash balances, cash flows
from operations and distributions from its investment in AFC. iDNA is currently
pursuing (i) reductions in its operating expenses, (ii) investments in new
marketing initiatives and (iii) new debt or equity financing as a means of
supplementing iDNA’s resources available to pursue new acquisitions, joint
ventures or other business development opportunities and to secure working
capital.
On
November 21, 2007, iDNA, via its wholly owned subsidiary, iDNA Cinema Holdings,
Inc. (“Holdings”), consummated a Master Loan and Security Agreement (the “Loan
Agreement”) with Silar Advisors, L.P. (“Silar”), as Lender and Administrative,
Payment and Collateral Agent, pursuant to which Silar agreed to provide a term
loan in an aggregate principal amount of $4,250,000 (the “Term Loan”) to
Holdings (the “Term Loan Financing”). Interest is to accrue on the Term Loan at
a per annum rate equal to the variable annual rate of interest designated from
time to time by Citibank N.A. as its “prime rate,” plus 4%, or, if greater,
12.25%, and is payable by Holdings on a quarterly basis. The Term Loan matures
on November 20, 2009 unless extended for one year at the option of Holdings,
upon written notice provided to Silar between fifteen (15) and forty-five (45)
days prior to the Maturity Date, provided that no default is then ongoing and
that Holdings is then in compliance with its financial covenants under the
Loan
Agreement.
iDNA
has
utilized the proceeds from the Term Loan Financing in the following manners:
(i)
approximately $1.0 million was applied for the repayment and retirement of
iDNA’s existing indebtedness to Seasons Go Round Inc.; (ii) approximately
$260,000 was used for prepayment of interest on the Term Loan; (iii)
approximately $167,000 was paid to Silar or its designee in satisfaction of
fees
and expenses due in connection with the Term Loan Financing; (iv) $60,000 was
paid to a consultant for its role in facilitating the Term Loan Financing;
and
(v) the remaining proceeds of approximately $2.7 million have been and will
continue to be utilized for working capital purposes.
iDNA’s
obligations under the Term Loan is secured by a pledge of all of Holdings’
assets, including all of the outstanding shares of National Cinemas, Inc.
(“NCI”), which owns a 50% membership interest in AFC.
The
Term Loan is also guaranteed by (i) iDNA (with such guaranty being secured
by a
pledge of substantially all of iDNA’s assets, other than the shares of its
operating subsidiaries) and (ii) NCI (with such guaranty being secured by a
pledge of substantially all of NCI’s assets, other than its 50% membership
interest in AFC).
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
In
connection with the Term Loan Financing, as required by the Loan Agreement,
iDNA
also issued to Silar a warrant (the “Warrant”) to purchase 1.5 million shares of
iDNA’s Common Stock at an exercise price of $0.27 per share. The number of
shares issuable upon exercise of the Warrant is subject to customary adjustment
in the event of a stock dividend, stock split, reverse stock split or similar
event and is furthermore subject to a weighted-average antidilution protection
in the event that iDNA issues additional shares of Common Stock for
consideration less than the existing exercise price under the Warrant.
Additionally, pursuant to the Warrant, the holder thereof has been granted
(subject to certain conditions, including the reimbursement of iDNA’s costs)
three demand registration rights for the underlying shares of Common Stock,
as
well as unlimited piggyback registration rights for such shares of Common
Stock.
As
of
October
31,
2007,
iDNA had cash and cash equivalents of $291,000. iDNA believes that its current
cash balances combined with cash distributions from its investment in AFC and
cash flow from operations and the net proceeds derived from the Term Loan will
be sufficient to pay operating expenses and existing liabilities, to fund
existing debt repayments and to fund its activities through the next twelve
months.
Other
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair
Value Measurement
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with Generally Accepted Accounting Principles
(“GAAP”), and expands disclosures about fair value measurements. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15,
2007. iDNA does not anticipate the application of this pronouncement will have
a
material impact on iDNA’s reported consolidated financial position or results of
operations.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007, and early application is allowed under certain circumstances. iDNA is
currently evaluating the impact SFAS No. 159 will have on its consolidated
financial position.
Inflation
Inflation
has not had a material adverse impact on iDNA.
Off-Balance
Sheet Arrangements
iDNA
does
not have in place any off-balance sheet arrangements (as defined in Item
303(a)(4) of Regulation S-K).
Forward
Looking Statements
Some
of
the information in this report contains forward looking statements within the
meaning of the federal securities laws that relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause us or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied
by
the forward-looking statements. You should not rely on forward-looking
statements in this report. Forward-looking statements typically are identified
by use of terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”,
“may”, “will”, “should”, “estimate”, “predict”, “potential”, “continue” and
similar words, although some forward-looking statements are expressed
differently. This report may contain forward-looking statements attributed
to
third parties relating to their estimates regarding the growth of our markets
or
other factors. All forward-looking statements address matters that involve
risk
and uncertainties, and there are many important risks, uncertainties and other
factors that could cause our actual results as well as those of the markets
we
serve, levels of activity, performance, achievements and prospects to differ
materially from the forward-looking statements contained in this report. You
should also consider carefully the statements under other sections of this
report that address additional factors that could cause our actual results
to
differ from those set forth in any forward-looking statements. We undertake
no
obligation to publicly update or review any forward-looking statements, whether
as a result of new information, future developments or otherwise.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Like
virtually all commercial enterprises, iDNA can be exposed to the risk (“market
risk”) that the cash flows to be received or paid relating to certain financial
instruments could change as a result of changes in interest rates, exchange
rates, commodity prices, equity prices and other market changes.
iDNA
does
not engage in trading activities and does not utilize interest rate swaps or
other derivative financial instruments or buy or sell foreign currency,
commodity or stock indexed futures or options. Accordingly, iDNA is not exposed
to market risk from these sources.
As
of
October 31, 2007, the interest rates under iDNA’s long term and convertible debt
are fixed. As a result iDNA has limited market risk associated with market
interest rates.
Item
4. Controls and Procedures.
As
of the
end of the period covered by this Quarterly Report on Form 10-Q, the Chief
Executive Officer and the Chief Financial Officer of iDNA (the “Certifying
Officers”) have conducted evaluations of iDNA’s disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure
controls and procedures” means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. The Certifying Officers have
reviewed iDNA’s disclosure controls and procedures and have concluded that those
disclosure controls and procedures were effective as of the end of our most
recent fiscal quarter. In compliance with Section 302 of the Sarbanes-Oxley
Act
of 2002, (18 U.S.C. 1350), each of the Certifying Officers has executed the
requisite Officer’s Certification included as Exhibit 31 to this Quarterly
Report on Form 10-Q.
The
Certifying Officers have also conducted an evaluation of iDNA’s internal control
over financial reporting and have concluded that there has been no change in
our
internal control over financial reporting during our most recent fiscal quarter
covered by this Quarterly Report on Form 10-Q that has materially affected,
or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. - OTHER
INFORMATION
Item
1. Legal
Proceedings
Self-Insurance
Reserves for Property Damage and Personal Injury Claims
iDNA,
under the names Agency Rent-A-Car, Inc. (“ARAC”), Altra Auto Rental and Automate
Auto Rental, previously engaged in the rental of automobiles on a short-term
basis, principally to the insurance replacement market. In Fiscal 1996, iDNA
discontinued its automobile rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by ARAC.
iDNA’s
wholly-owned subsidiary ARAC maintained and continues to maintain self-insurance
for claims relating to bodily injury or property damage from accidents involving
the vehicles rented to customers by its discontinued automobile rental
operations occurring in Fiscal 1996 and prior. ARAC was, when required by either
governing state law or the terms of its rental agreement, self-insured for
the
first $1.0 million per occurrence, and for losses in excess of $5.0 million
per
occurrence, for bodily injury and property damage resulting from accidents
involving its rental vehicles. ARAC was also self-insured, up to certain
retained limits, for bodily injury and property damage resulting from accidents
involving ARAC vehicles operated by employees within the scope of their
employment.
ARAC
is
subject to certain self-insurance claims and litigation expenses relating to
its
discontinued automobile rental operations. iDNA’s management estimates the
required self-insurance liability based upon specific identification of the
known matters subject to future claims, the nature of the claim and the
estimated costs to be incurred. These estimates include, but are not limited
to,
ARAC’s historical loss experience and projected loss factors. The required
self-insurance liability is subject to adjustment in the future based upon
changes in the nature of the remaining claims or the ultimate cost. As a
consequence of iDNA’s sale of its automobile rental operations in 1995, iDNA
believes that all incurred claims have been reported to ARAC and that there
are
no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at October 31, 2007 and January 31, 2007 was
$235,000 and $235,000, respectively.
Because
of the uncertainties related to several residual small claims and legal
proceedings involving iDNA’s former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect the adjudication
or settlement of these matters will have on iDNA. As additional information
regarding iDNA’s potential liabilities becomes available, iDNA will revise the
estimates as appropriate.
Other
Litigation
In
the
normal course of its business, iDNA is periodically named as defendant in legal
proceedings. It is the policy of iDNA to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate. In the
opinion of management, the amount of ultimate liability with respect to any
current actions, if any, is unlikely to materially affect our financial
position, results of operations or liquidity.
Item
1A. Risk
Factors.
Not
applicable
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
Not
applicable
Item
3. Defaults
Upon Senior Securities.
Not
applicable
Item
4. Submission
of Matters to a Vote of Security Holders.
Not
applicable
Item
5. Other
Information.
Not
applicable
Item
6. Exhibits.
Exhibit
Number
|
Title
of Exhibit
|
Page
Number
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed on November 4, 2005, SEC File No.
1-11601).
|
N/A
|
|
|
|
3.2
|
Second
Amended and Restated By-Laws of the Company dated as of November
4, 2005
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report
on Form 8-K filed on November 4, 2005, SEC File No. 1-11601).
|
N/A
|
Exhibit
Number
|
Title
of Exhibit
|
Page
Number
|
|
|
|
4.1
|
Certificate
of Designation Preferences and Rights of Series D Junior Participating
Preferred Stock of the Company (incorporated by reference to Exhibit
4.1
to the Company’s Current Report on Form 8-K filed on October 9, 2001, SEC
File No. 1-11601).
|
N/A
|
|
|
|
4.2
|
Specimen
Stock Certificate - of the Company’s Common Stock (incorporated by
reference to Exhibit 4(c) to the Company’s Annual Report on Form 10-K for
the fiscal year ended January 31, 1996, filed on April 25, 1996,
SEC File
No. 1-11601).
|
N/A
|
|
|
|
4.3
|
Rights
Agreement, dated as of September 26, 2001, between the Company and
American Stock Transfer & Trust Company, which includes the form of
Certificate of Designation, Preferences and Rights for the Series
D Junior
Participating Preferred Stock as Exhibit “A”, the form of Rights
Certificate as Exhibit “B” and the Summary of Rights to Purchase Preferred
Stock as Exhibit “C” (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K, filed on October 9, 2001, SEC File
No. 1-11601).
|
N/A
|
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
of the
Securities Exchange Act of 1934
|
47
|
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
of the
Securities Exchange Act of 1934
|
48
|
|
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. (Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
49
|
|
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. (Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
50
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
iDNA,
INC.
|
|
|
|
Date:
December 14, 2007
|
By:
|
/s/
James J. McNamara
|
|
|
James
J. McNamara
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
|
(principal
executive officer)
|
|
|
|
|
By:
|
/s/
Robert V. Cuddihy, Jr.
|
|
|
Robert
V. Cuddihy, Jr.
|
|
|
Chief Financial Officer, Secretary and Treasurer
|
|
|
(principal
accounting and financial
officer)
|