Unassociated Document
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 April
30, 2008
OR
(
) 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
(
)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large
accelerated filer ( ) Accelerated filer ( ) Non-accelerated filer ( ) Smaller
reporting company ( X )
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes ( )
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 June 12, 2008
|
Common
Stock, $0.05 par
value
|
10,585,864
|
iDNA,
Inc. and Subsidiaries
TABLE
OF CONTENTS
|
|
PAGE
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of
April
30, 2008 and January 31, 2008
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the
Three
Months Ended April 30, 2008 and 2007
|
4
|
|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity and
Comprehensive
Loss for the Three Months Ended
April
30, 2008
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the
Three
Months Ended April 30, 2008 and 2007
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
|
21
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
35
|
|
|
|
Item
4.
|
Controls
and Procedures
|
35
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
36
|
|
|
|
Item 1A. |
Risk
Factors |
37
|
|
|
|
Item 2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds |
37
|
|
|
|
Item 3. |
Defaults
Upon Senior Securities |
37
|
|
|
|
Item 4. |
Submission
of Matters to a Vote of Security Holders |
37
|
|
|
|
Item
5.
|
Other
Information
|
37
|
|
|
|
Item
6.
|
Exhibits
|
38
|
|
|
|
Signatures
|
|
39
|
|
|
|
Certifications
|
|
40
|
PART
I. FINANCIAL INFORMATION
Item
1.
Financial Statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
|
|
|
April
30,
2008
|
|
|
January
31,
2008
|
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
110
|
|
$
|
169
|
|
Restricted
cash (Note 1)
|
|
|
147
|
|
|
147
|
|
Investment
in trading securities (Note 1)
|
|
|
524
|
|
|
1,421
|
|
Accounts
receivable, net of allowance
|
|
|
|
|
|
|
|
of
$90 and $75, respectively (Note 1)
|
|
|
1,815
|
|
|
1,453
|
|
Income
taxes refundable
|
|
|
19
|
|
|
19
|
|
Inventory
(Note 1)
|
|
|
155
|
|
|
165
|
|
Prepaid
expenses
|
|
|
454
|
|
|
444
|
|
Other
current assets
|
|
|
55
|
|
|
90
|
|
Total
current assets
|
|
|
3,279
|
|
|
3,908
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $3,531 and $3,325, respectively (Note 1)
|
|
|
1,981
|
|
|
2,102
|
|
Investment
in AFC (Note 2)
|
|
|
6,765
|
|
|
7,129
|
|
Other
assets
|
|
|
374
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,399
|
|
$
|
13,553
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long term obligations (Note 3)
|
|
$
|
1,003
|
|
$
|
1,123
|
|
Accounts
payable
|
|
|
1,449
|
|
|
1,220
|
|
Deferred
revenue (Note 1)
|
|
|
1,481
|
|
|
1,552
|
|
Self-insurance
claims (Note 4)
|
|
|
157
|
|
|
172
|
|
Other
liabilities
|
|
|
1,169
|
|
|
1,324
|
|
Total
current liabilities
|
|
|
5,259
|
|
|
5,391
|
|
|
|
|
|
|
|
|
|
Long
term obligations (Note 3)
|
|
|
13,127
|
|
|
13,373
|
|
Convertible
promissory note (Note 3)
|
|
|
2,825
|
|
|
2,825
|
|
Accrued
income taxes, long term
|
|
|
616
|
|
|
610
|
|
|
|
|
21,827
|
|
|
22,199
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 4)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
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
|
|
|
175,579
|
|
|
175,537
|
|
Retained
deficit
|
|
|
(165,330
|
)
|
|
(164,076
|
)
|
Deferred
compensation
|
|
|
(12
|
)
|
|
(18
|
)
|
Treasury
stock, at cost, 29,363,725 and 29,938,725
|
|
|
|
|
|
|
|
shares,
respectively
|
|
|
(21,662
|
)
|
|
(22,086
|
)
|
Total
stockholders' equity
|
|
|
(9,428
|
)
|
|
(8,646
|
)
|
|
|
$
|
12,399
|
|
$
|
13,553
|
|
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
April
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues
(Note 1)
|
$
|
3,503
|
|
$
|
3,600
|
|
Cost
of revenues (Note 1)
|
|
2,334
|
|
|
2,521
|
|
Gross
profit
|
|
1,169
|
|
|
1,079
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
2,077
|
|
|
2,334
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
(908
|
)
|
|
(1,255
|
)
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
Income
from AFC investment (Note 2)
|
|
236
|
|
|
271
|
|
Interest
income
|
|
1
|
|
|
2
|
|
Interest
expense (Note 3)
|
|
(234
|
)
|
|
(55
|
)
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
before
income taxes
|
|
(905
|
)
|
|
(1,037
|
)
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
(6
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
(911
|
)
|
|
(1,043
|
)
|
|
|
|
|
|
|
|
Income
from discontinued
|
|
|
|
|
|
|
operations,
net of tax
|
|
1
|
|
|
5
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(910
|
)
|
$
|
(1,038
|
)
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
|
|
|
|
|
Continuing
operations
|
$
|
(.09
|
)
|
$
|
(.11
|
)
|
Discontinued
operations
|
|
-
|
|
|
-
|
|
Net
loss per share
|
$
|
(.09
|
)
|
$
|
(.11
|
)
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
of
shares outstanding
|
|
|
|
|
|
|
Basic
and diluted
|
|
10,049
|
|
|
9,861
|
|
See
accompanying notes to condensed consolidated financial statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statement of Stockholders’ Equity
and
Comprehensive Loss
Three
Months Ended April 30, 2008
(in
thousands, except share data)
(unaudited)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Paid-In
Capital
|
|
|
Retained
Deficit
|
|
|
Treasury
Stock
|
|
|
Deferred
Compensation
Expense
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31, 2008
|
|
-
|
|
$
|
-
|
|
|
39,949,589
|
|
$
|
1,997
|
|
$
|
175,537
|
|
$
|
(164,076
|
)
|
$
|
(22,086
|
)
|
$
|
(18
|
)
|
$
|
(8,646
|
)
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
(910
|
)
|
$
|
(910
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
Treasury
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(344
|
)
|
|
424
|
|
|
|
|
|
80
|
|
|
|
|
Deferred
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
30, 2008
|
|
-
|
|
$
|
-
|
|
|
39,949,589
|
|
$
|
1,997
|
|
$
|
175,579
|
|
$
|
(165,330
|
)
|
$
|
(21,662
|
)
|
$
|
(12
|
)
|
$
|
(9,428
|
)
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
|
|
Three
Months Ended April 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(910
|
)
|
$
|
(1,038
|
)
|
Adjustments
to reconcile net loss to net cash provided by
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
206
|
|
|
419
|
|
Non-cash
interest
|
|
|
72
|
|
|
-
|
|
Income
from AFC investment
|
|
|
(236
|
)
|
|
(271
|
)
|
Share-based
compensation expense
|
|
|
122
|
|
|
77
|
|
Stock
issued as compensation for services rendered
|
|
|
-
|
|
|
33
|
|
Amortization
of deferred compensation expense
|
|
|
6
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(362
|
)
|
|
(352
|
)
|
Accrued
income tax/refundable
|
|
|
6
|
|
|
-
|
|
Accounts
payable
|
|
|
229
|
|
|
(95
|
)
|
Deferred
revenue
|
|
|
(71
|
)
|
|
346
|
|
Self
insurance claims
|
|
|
(15
|
)
|
|
|
|
Other
operating assets and liabilities, net
|
|
|
(80
|
)
|
|
369
|
|
Net
cash used in operating activities
|
|
|
(1,033
|
)
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from AFC distributions
|
|
|
600
|
|
|
750
|
|
Proceeds
from sale of marketable securities
|
|
|
897
|
|
|
-
|
|
Purchase
of other property and equipment
|
|
|
(85
|
)
|
|
(15
|
)
|
Net
cash provided by investing activities
|
|
|
1,412
|
|
|
735
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
14
|
|
Payments
of loan origination fees
|
|
|
(43
|
)
|
|
-
|
|
Payments
on debt, notes payable and capital lease
|
|
|
(395
|
)
|
|
(16
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(438
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(59
|
)
|
|
226
|
|
Cash
and cash equivalents at beginning of period
|
|
|
169
|
|
|
548
|
|
Cash
and cash equivalents at end of period
|
|
$
|
110
|
|
$
|
774
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
169
|
|
$
|
41
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
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, 2008. The results of operations for the three months ended April
30,
2008 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 the 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 2009” shall mean iDNA’s fiscal year ending January 31, 2009 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.
Investments
in Trading Securities
iDNA’s
investment in trading securities is comprised of an investment in a mutual
fund
which invests in highly liquid, AAA fixed income securities. iDNA’s investment
in trading securities is carried at fair market value at April 30, 2008.
Unrealized gains or losses on trading securities are credited or charged to
operations. Interest and dividends earned on the investment are recorded as
interest income.
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
$55,000 and $90,000, respectively, are reported as other current assets at
April
30, 2008 and January 31, 2008.
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 April 30, 2008 and 2007, electronic
equipment sales were $476,000 and $576,000, 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 $102,000 and $97,000, respectively, to research and development
expense for the three months ended April 30, 2008 and 2007.
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 April
30,
2008
and January 31, 2008.
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 through January 31, 2008,
are
not subject to amortization but are subject to testing for impairment at least
annually or whenever there is an impairment indicator (see below).
Valuation
of Long-Lived Assets
iDNA
reviews
the carrying value of its long-lived assets (other than goodwill) whenever
events or changes in circumstances indicate that its carrying amount may not
be
recoverable. When indicators of impairment exist, iDNA determines whether the
estimated undiscounted sum of the future cash flows of 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.
At
January 31, 2008, the goodwill for each of iDNA’s business segments (information
services and strategic communications services) was tested for impairment.
As a
consequence of the testing, iDNA determined that the carrying value of both
its
information services and its strategic communications services business segments
exceeded their fair value, which was estimated based upon the present value
of
each reporting units expected future cash flows. As a consequence, iDNA charged
to operations an aggregate of $8.0 million for the estimated impairment of
goodwill and other intangible assets relating to (i) its information services
segment in the amount of $5.9 million, and (ii) strategic communication services
segment in the amount of $2.1 million, respectively,
resulting in the reduction of the carrying value of all goodwill and other
intangible assets to zero. Prior to the impairment charge during the fourth
quarter of Fiscal 2008, iDNA charged to operations $203,000 for the amortization
of these intangibles for the three months ended April 30, 2007.
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 the Financial Accounting Standards
Board (“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 more 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, upon its adoption as of February
1,
2007, iDNA recorded an adjustment to retained deficit of $329,000, inclusive
of
interest, to reflect potential liabilities for iDNA’s uncertain tax positions,
inclusive of interest. iDNA recognizes interest and penalties associated with
uncertain tax positions as a component of tax expense (benefit). For the three
months ended April 30, 2008, iDNA charged to operations $6,000 for income
taxes.
As
of
January 31, 2008 iDNA has federal net operating loss carryforwards of $91.5
million of which approximately $24.5 million is estimated to expire due to
the
limitations described below. As a consequence, iDNA’s remaining federal net
operating loss carryforwards of $67.0 million may be used to reduce future
taxable income. Largely
as a consequence of these operating loss carryforwards, iDNA reported a net
deferred tax asset of $29.0 million and an offsetting valuation allowance of
$29.0 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 $24.5 million of these pre-change losses may expire
unused.
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 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 $122,000 and $77,000,
respectively, for share-based compensation for the three months ended April
30,
2008 and 2007
Earnings
Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of iDNA’s 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 ended April 30, 2008 and 2007. For the
three months ended April 30, 2008 and 2007, there were 0 and 264,245 common
stock equivalents, respectively, excluded from 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 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. The FASB agreed to a one-year deferral of the effective date for
non-financial assets and liabilities that are recognized or disclosed at fair
value on a non-recurring basis. The application of this pronouncement did not
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. The adoption of this pronouncement did not have a material impact on
iDNA’s reported consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No. 141-R, Business
Combinations.
SFAS
No. 141-R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The objective of SFAS No. 141-R
is to improve the relevance, representational faithfulness and comparability
of
the information that a reporting entity provides in its financial reports about
a business combination. SFAS No, 141-R changes the requirements for an
acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. 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
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment to ARB
No.51.
SFAS
No. 160 requires that (i) noncontrolling (minority) interests be reported as
a
component of shareholders’ equity, (ii) net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated
statement of operations, (iii) changes in a parent’s ownership interest while
the parent retains its controlling interest be accounted for as equity
transactions, (iv) any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value, and (v)
sufficient disclosures are provided that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No.160 is effective for annual periods beginning after December
15,
2008. 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.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 - Basis of Presentation and Significant Accounting Policies
-
continued
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities”
(“SFAS
161”). SFAS 161 enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding
of
(i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. 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.
Reclassifications
Certain
Fiscal 2008 amounts have been reclassified to conform with Fiscal 2009
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 Centers,
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. 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 April 30, 2008 and 2007, iDNA recorded
income of $236,000 and $271,000, 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 ended March 31, 2008 and
2007, respectively, is as follows (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,847
|
|
$
|
2,000
|
|
|
|
|
|
|
|
Film
rental
|
|
|
480
|
|
|
562
|
Operating
costs
|
|
|
675
|
|
|
654
|
Depreciation
and amortization
|
|
|
197
|
|
|
195
|
General
and administrative expenses
|
|
|
22
|
|
|
47
|
|
|
|
1,374
|
|
|
1,458
|
Net
income
|
|
$
|
473
|
|
$
|
542
|
iDNA's
proportionate share of net income
|
|
$
|
236
|
|
$
|
271
|
Note
3 - Current and Long Term Obligations
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 provided a term loan
in an
aggregate principal amount of $4.25 million (the “Term Loan”) to Holdings (the
“Term Loan Financing”). Interest accrues 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. At April 30, 2008, the “prime rate”
was 5.0%. 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. At April 30, 2008, Holdings and
iDNA were in compliance with the financial covenants under the Loan Agreement.
At April 30, 2008, the principal balance of the Term Loan was $3.9 million.
Holdings’
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).
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 - Current and Long Term Obligations - continued
In
connection with the consummation of the Term Loan, as required by the Loan
Agreement, iDNA issued warrants to Silar and a consultant (the “Warrants”) to
purchase 1.5 million and 60,000 shares, respectively, of iDNA’s Common Stock at
an exercise price of $0.27 per share. The number of shares issuable upon
exercise of the Warrants 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 Warrants. Additionally, pursuant to the
Warrants, 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. The fair value of the
Warrants at the date of grant was $339,000. At April 30, 2008, the unamortized
fair value of the Warrants issued in the amount of $277,000 was recorded as
a
reduction of the principal on the Term Loan. iDNA charges to interest expense
the fair value of the Warrants over the expected three year term of the Term
Loan. For the three months ended April 30, 2008, iDNA charged to interest
expense $29,000 for the fair value of the Warrants.
On
January 31, 2008, ARS consummated an auto loan with a financing institution
for
the purchase of a delivery van in the principal amount of $24,000. The auto
loan
is repayable in monthly installments of $755 with the last payment due February
2011. The auto loan bears interest at the rate of 9.0% and is collateralized
by
the van purchased with the proceeds from the loan. At April 30, 2008, the
principal balance of the auto loan was $23,000.
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 April 30, 2008, iDNA had outstanding principal obligations
under the terms of the OTI Promissory Notes of $855,000 and accrued interest
obligations of $12,000.
As
of
January 31, 2008, OTI did not meet certain minimum financial performance
criterion and, as a consequence, (i) iDNA retained an option to reduce the
purchase price in an amount estimated between $206,000 and $412,000 and (ii)
for
the three months ended April 30, 2008 no interest was incurred under the OTI
Promissory Notes. iDNA has not exercised its option to reduce the purchase
price
for its acquisition of OTI as of June 12, 2008 and no adjustment to the OTI
Promissory Notes was recorded at April 30, 2008. Prospectively, interest may
accrue pursuant to the terms of the OTI Promissory Notes once the minimum
operating cash flow thresholds are achieved.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 - Current and Long Term Obligations - continued
As
a
consequence of iDNA’s acquisition of Audience Response Systems, Inc. and the
Campus Group Companies, Inc. (collectively, the “Campus Group”) effective July
31, 2003, iDNA issued to Mr. Steve Campus and certain family trusts
(collectively, the former shareholders of the Campus Group) 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
April 30, 2008, 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 obligations of
$156,000.
For
the
trailing twelve month period ended April 30, 2008 and April 30, 2007, the Campus
Group’s financial performance was 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 three months
ended April 30, 2008 or 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 April 30, 2008, the remaining
balance of the SBA Loan of $291,000 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 are
collateralized by substantially all of OMI’s assets and the personal guarantee
of Mr. Dean Thompson, President of OMI.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 - Current and Long Term Obligations - continued
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 bears an implied interest
rate of 10% and is payable in monthly installments with the last payment due
in
July 2009. At April 30, 2008, the remaining balance due under the capital lease
was $44,000. The accumulated depreciation for the underlying equipment pursuant
to the capital lease was $57,000 and $48,000, respectively, at April 30, 2008
and January 31, 2008.
The
components of long term obligations at April 30, 2008 are as follows (in
thousands):
|
|
|
Amounts
|
|
Auto
loan
|
|
$
|
23
|
|
Capital
leases
|
|
|
44
|
|
SBA
loan
|
|
|
291
|
|
Term
Loan
|
|
|
3,596
|
|
OTI
promissory notes
|
|
|
855
|
|
Base
promissory notes
|
|
|
6,046
|
|
Trailing
promissory notes
|
|
|
3,275
|
|
Convertible
debt
|
|
|
2,825
|
|
|
|
|
16,955
|
|
Less
current maturities
|
|
|
(1,003
|
)
|
Long-term
obligations and
|
|
|
|
|
convertible
debt
|
|
$
|
15,952
|
|
iDNA’s
current maturities and long term obligations at April 30, 2008 are as follows
(in thousands):
|
|
|
Amounts
|
|
2009
|
|
$
|
1,006
|
|
2010
|
|
|
1,678
|
|
2011
|
|
|
8,249
|
|
2012
|
|
|
577
|
|
2013
|
|
|
1,124
|
|
Thereafter
|
|
|
4,601
|
|
|
|
|
17,235
|
|
Less
- unamortized debt discount
|
|
|
(277
|
)
|
Less
- capital lease interest
|
|
|
(3
|
)
|
|
|
$
|
16,955
|
|
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 April 30, 2008 and January 31, 2008 was
$157,000 and $172,000, respectively.
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 ended April 30, 2008 and 2007. Prior
financial periods have been conformed to the current presentation (in
thousands):
|
|
|
Information
Services
|
|
|
|
|
|
Entertainment
|
|
|
Undistributed
Corporate
Expenses
|
|
|
Intersegment
Elimination
|
|
|
Total
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,097
|
|
$
|
1,441
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(35
|
)
|
$
|
3,503
|
|
Operating
income (loss)
|
|
|
(489
|
)
|
|
(238
|
)
|
|
236
|
|
|
(414
|
)
|
|
-
|
|
|
(905
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
133
|
|
|
62
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
206
|
|
Capital
expenditures
|
|
|
68
|
|
|
4
|
|
|
-
|
|
|
13
|
|
|
-
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,305
|
|
$
|
1,326
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(31
|
)
|
$
|
3,600
|
|
Operating
income (loss)
|
|
|
(226
|
)
|
|
(811
|
)
|
|
271
|
|
|
(271
|
)
|
|
-
|
|
|
(1,037
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
220
|
|
|
185
|
|
|
-
|
|
|
14
|
|
|
-
|
|
|
419
|
|
Capital
expenditures
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
12
|
|
|
-
|
|
|
15
|
|
Item
2.
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. 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
$55,000 and $90,000, respectively, are reported as other current assets at
April
30, 2008 and January 31, 2008.
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 April 30, 2008 and 2007, electronic
equipment sales were $476,000 and $576,000, 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 its carrying amount
may not be recoverable. When indicators of impairment exist, iDNA determines
whether the estimated undiscounted sum of the future cash flows of 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.
At
January 31, 2008, the goodwill for each of iDNA’s business segments (information
services and strategic communications services) was tested for impairment.
As a
consequence of the testing, iDNA determined that the carrying value of both
its
information services and its strategic communications services business segments
exceeded their fair value, which was estimated based upon the present value
of
each reporting units expected future cash flows. As a consequence, iDNA charged
to operations an aggregate of $8.0 million for the estimated impairment of
goodwill and other intangible assets relating to (i) its information services
segment in the amount of $5.9 million, and (ii) strategic communication services
segment in the amount of $2.1 million, respectively, resulting in the carrying
value of all goodwill and other intangible assets being reduced to zero. Prior
to the impairment charge during the fourth quarter of Fiscal 2008, iDNA charged
to operations $203,000 for the amortization of these intangibles for the three
months ended April 30, 2007.
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.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
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 April 30, 2008 and January 31, 2008 was
$157,000 and $172,000, 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.
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 $122,000 and $77,000,
respectively, for share-based compensation for the three months ended April
30,
2008 and 2007.
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 April 30, 2008
as
Compared to the Three Months Ended April 30, 2007
The
following table sets forth for the three months ended April 30, 2008 and 2007
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
April
30,
|
|
|
Strategic
Communications
Services
Three
Months Ended
April
30,
|
|
|
Intersegment
Elimination
Three
Months Ended
April
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,097
|
|
$
|
2,305
|
|
$
|
1,441
|
|
$
|
1,326
|
|
$
|
(35
|
)
|
$
|
(31
|
)
|
Cost
of revenues
|
|
|
1,424
|
|
|
1,346
|
|
|
945
|
|
|
1,206
|
|
|
(35
|
)
|
|
(31
|
)
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
1,162
|
|
|
1,186
|
|
|
735
|
|
|
931
|
|
|
-
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(489
|
)
|
|
(226
|
)
|
|
(238
|
)
|
|
(811
|
)
|
|
-
|
|
|
-
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
133
|
|
|
220
|
|
|
62
|
|
|
185
|
|
|
-
|
|
|
-
|
|
|
|
|
Entertainment
Three
Months Ended
April
30,
|
|
|
Undistributed
Corporate
Expenses
Three
Months Ended
April
30,
|
|
|
Consolidated
Three
Months Ended
April
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,503
|
|
$
|
3,600
|
|
Cost
of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,334
|
|
|
2,521
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
-
|
|
|
-
|
|
|
180
|
|
|
217
|
|
|
2,077
|
|
|
2,334
|
|
Operating
income (loss)
|
|
|
236
|
|
|
271
|
|
|
(414
|
)
|
|
(271
|
)
|
|
(905
|
)
|
|
(1,037
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
14
|
|
|
206
|
|
|
419
|
|
Revenues:
Revenues
decreased $97,000 to $3.5 million for the three months ended April 30, 2008
as
compared to $3.6 million for the three months ended April 30, 2007.
Revenues
attributed to the information services segment decreased $208,000 to $2.1
million for the three months ended April 30, 2008 as compared to $2.3 million
for the three months ended April 30, 2007. The decrease in revenues was
principally due to (i) a decline in electronic equipment sales of $99,000 and
(ii) a decrease of $109,000 as a consequence of changes in the timing and/or
scope of the projects completed during the three months ended April 30, 2008
as
compared to the three months ended April 30, 2007.
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 $115,000
to $1.4 million for the three months ended April 30, 2008 as compared to $1.3
million for the three months ended April 30, 2007. The increase in revenues
was
principally due to an increase in the scope and size of projects completed
during the three months ended April 30, 2008 as compared to the three months
ended April 30,, 2007.
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.
Cost
of Service Revenues:
Cost of
revenues for the three months ended April 30,, 2008 and 2007 was $2.3 million
and $2.5 million, respectively.
Cost
of
revenues attributed to the information services segment was $1.4 million for
the
three months ended April 30, 2008 as compared to $1.3 million for the three
months ended April 30,, 2007.
The
gross
profit realized by the information services segment for the three months ended
April 30, 2008 and 2007 was $673,000 and $959,000, respectively. The gross
profit decrease of $286,000 for the three months ended April 30, 2008 as
compared to the three months ended April 30, 2007 is due principally to the
net
effect of (i) a decrease in revenues, (ii) a decrease in project margins for
the
period offset by (iii) a decrease of $13,000 in project overhead costs. The
gross margin for the three months ended April 30, 2008 decreased 9.5% to 32.1%
as compared to 41.6% for the three months ended April 30, 2007, principally
due
to (i) a decrease of 9.2% associated with equipment sales, (ii) an increase
in
direct project costs of 9.3% that resulted in lower project margins and (iii)
an
increase of 1.2% in indirect production overhead expenses as a percentage of
revenues.
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 decreased $261,000
to $945,000 for the three months ended April 30, 2008 as compared to $1.2
million for the three months ended April 30, 2007. The decrease in the costs
of
revenues was principally due to a decrease in direct project costs of $273,000
as a consequence of the net effect of (i) an increased utilization of internal
production staff and resources offset by (ii) a reduction in outside production
costs for the three months ended April 30, 2008 as compared to the three months
ended April 30, 2007. The gross profit realized by the strategic communications
segment for the three months ended April 30, 2008 and 2007 was $496,000 and
$120,000, respectively. The gross profit increase of $376,000 for the three
months ended April 30, 2008 as compared the three months ended April 30, 2007
was principally due to a favorable mix of production projects utilizing internal
production staff and resources. 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 April 30, 2008 and the three months ended
April 30, 2007 was $2.1 million and $2.3 million, respectively.
SG&A
attributed to the information services segment was $1.2 million and $1.2 million
respectively, for three months ended April 30, 2008 and the three months ended
April 30, 2007. The decrease in SG&A of $24,000 was principally due to the
net effect of (i) a decrease of $92,000 for depreciation and amortization
expense as a consequence of the elimination of the amortization of certain
intangible assets written off in Fiscal 2008 offset by (ii) an increase in
personnel and related cost of $59,000.
SG&A
attributable to the strategic communications services segment decreased $196,000
to $735,000 for the three months ended April 30, 2008 as compared to $931,000
for the three months ended April 30, 2007. The decrease in SG&A was due to
(i) a decrease of $111,000 for depreciation and amortization expense as a
consequence of the elimination of the amortization of certain intangible assets
written off in Fiscal 2008 and (ii) a decrease in facility expenses as a
consequence of the consolidation of certain facilities implemented in Fiscal
2008.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
SG&A
for undistributed corporate expenses for the three months ended April 30, 2008
and April 30, 2007 was $180,000 and $217,000, 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 $37,000 for the three months ended April 30, 2008 as compared to the
three months ended April 30, 2007 was due principally to the net effect of
(i)
lower professional fees from company advisors, (ii) the reduction in facility
rent and related occupancy costs as iDNA consolidated its New York City-based
strategic communications operations into one facility, offset by (iii) a net
increase in personnel and related benefit expenses.
Income
from AFC Investment:
iDNA
accounts for its investment in AFC using the equity method. For the three months
ended April 30, 2008 and April 30, 2007, iDNA recorded income of $236,000 and
$271,000, respectively, representing iDNA’s share of AFC’s net income.
Summarized
income statement data for AFC for the three months ended March 31, 2008 and
2007, respectively, is as follows (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
1,847
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
Film
rental
|
|
|
480
|
|
|
562
|
|
Operating
costs
|
|
|
675
|
|
|
654
|
|
Depreciation
and amortization
|
|
|
197
|
|
|
195
|
|
General
and administrative expenses
|
|
|
22
|
|
|
47
|
|
|
|
|
1,374
|
|
|
1,458
|
|
Net
income
|
|
$
|
473
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income
|
|
$
|
236
|
|
$
|
271
|
|
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
AFC’s
revenues decreased $153,000 for the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007, principally as a result
of
the net effects of (i) a decrease of 13.4% in attendance period-to-period,
(ii)
a decrease of $20,000 in other, concession and café revenues, offset by, (iii) a
6.0% 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 2.1% to 26.0% from 28.1% for the three months ended March
31, 2008 and 2007, 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 3.8% to 36.5% for the
three months ended March 31, 2008, as compared to 32.7% for the three months
ended March 31, 2007 due principally to decreased revenues for the three months
ended March 31, 2008 as compared to the three months ended March 31, 2007.
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 April 30, 2008 and 2007, iDNA incurred interest expense
of
$234,000 and $55,000, respectively. The increase of $179,000 in interest expense
for the three month period ended April 30, 2008 as compared to the three month
period ended April 30, 2007 is due principally to an increase in interest costs
attributable to the Term Loan (defined below) consummated in November
2007.
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 April 30, 2008 and April 30, 2007. 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. For the three
months ended April 30, 2008, iDNA has charged to income tax expense $6,000
relating to estimated state and local income taxes.
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 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 provided a term loan in an aggregate principal amount of $4.25
million (the “Term Loan”) to Holdings (the “Term Loan Financing”). Interest
accrues 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. At April 30, 2008, the “prime rate” was 5.0%. 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. At April 30, 2008, Holdings and iDNA were in compliance with the
financial covenants under the Loan Agreement. At April 30, 2008, the principal
balance of the Term Loan was $3.9 million. 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)
National Cinemas, Inc. (“NCI”), which owns a 50% membership interest in AFC
(with such guaranty being secured by a pledge of substantially all of NCI’s
assets, other than its 50% membership interest in AFC).
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 April 30, 2008, iDNA had outstanding principal obligations
under the terms of the OTI Promissory Notes of $855,000 and accrued interest
obligations of $12,000.
As
of
January 31, 2008, OTI did not meet certain minimum financial performance
criterion and, as a consequence, (i) iDNA retained an option to reduce the
purchase price in an amount estimated between $206,000 and $412,000 and (ii)
for
the three months ended April 30, 2008 no interest was incurred under the OTI
Promissory Notes. iDNA has not exercised its option to reduce the purchase
price
for its acquisition of OTI as of June 12, 2008 and no adjustment to the OTI
Promissory Notes was recorded at April 30, 2008. Prospectively, interest may
accrue pursuant to the terms of the OTI Promissory Notes once the minimum
operating cash flow thresholds are achieved.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
As
a
consequence of iDNA’s acquisition of Audience Response Systems, Inc. and the
Campus Group Companies, Inc. (collectively, the “Campus Group”) effective July
31, 2003, iDNA issued to Mr. Steve Campus and certain family trusts promissory
notes (the former shareholders of the Campus Group) 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 April 30, 2008, 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 obligations of $156,000.
For
the
trailing twelve month periods ended April 30, 2008 and April 30, 2007, the
Campus Group’s financial performance was 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 three
months ended April 30, 2008 or 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 April 30, 2008, the remaining
balance of the SBA Loan of $291,000 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 are
collateralized by substantially all of OMI’s assets and payment thereunder is
subject to the personal guarantee of Mr. Dean Thompson, President of OMI.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
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 bears an implied interest
rate of 10% and is payable in monthly installments with the last payment due
in
July 2009. At April 30, 2008, the remaining balance due under the capital lease
was $44,000.
On
January 31, 2008, ARS consummated an auto loan with a financing institution
for
the purchase of a delivery van in the principal amount of $24,000. The auto
loan
is repayable in monthly installments of $755 with the last payment due February
2011. The auto loan bears interest at the rate of 9.0% and is collateralized
by
the van purchased with the proceeds from the loan. At April 30, 2008, the
principal balance of the auto loan was $23,000.
For
the
three months ended April 30, 2008, iDNA’s cash and cash equivalents decreased
$59,000 due principally to the net effects of (i) proceeds from the sale of
marketable securities of $897,000, (ii) AFC distributions of $600,000 offset
by
(iii) cash flows used in operations of $1.0 million, (iv) capital expenditures
of $85,000, and (v) the repayment of debt and fees of $438,000.
Prior
to
the Term Loan, iDNA had limited external sources of financing and has operated
on its existing cash balances, cash flows from operations and distributions
from
its investment in AFC. iDNA will continue to pursue reductions in its operating
expenses, invest in marketing initiatives and seek new debt or equity financing
(though there can be no assurance iDNA will obtain such financing) as means
of
supplementing iDNA’s resources available to pursue new acquisitions, joint
ventures or other business development opportunities. At April 30, 2008, iDNA
had unrestricted cash of $110,000 and investments in trading securities of
$524,000 which together with any cash flow derived from its investment in AFC
and the operations of iDNA’s corporate communications business will be used to
pursue such opportunities and reduce debt.
In
addition, iDNA has initiated preliminary discussions with the former
shareholders of the Campus Group to restructure the Campus Notes in the
aggregate amount of $12.1 million and/or reduce the original purchase
consideration of the Campus Group acquisition. Currently, iDNA’s payment
obligations are deferred until certain performance criteria are met. Although
iDNA is seeking to restructure its obligations under the Campus Notes and/or
reduce the original purchase consideration, there can be no assurance that
such
negotiations will result in a restructuring and/or a reduction in the original
purchase consideration. iDNA believes that its available cash and cash
equivalents and investments in trading securities totaling $634,000 at April
30,
2008 and any cash distributions from its investment in AFC and cash flow from
operations will be sufficient to pay operating expenses, existing liabilities,
fund existing debt repayments and fund its activities through the next twelve
months as iDNA explores new strategic business alternatives. However, as
previously discussed, iDNA’s lack of external financing sources may limit its
ability to pursue strategic business alternatives being considered by iDNA’s
Board of Directors. Such limitations may have an adverse impact on iDNA’s
financial position, results of operations and liquidity.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Other
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued 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. The FASB agreed to a one-year deferral of the effective date for
non-financial assets and liabilities that are recognized or disclosed at fair
value on a non-recurring basis. The application of this pronouncement did not
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. The adoption of this pronouncement did not have a material impact on
iDNA’s reported consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No. 141-R, Business
Combinations.
SFAS
No. 141-R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The objective of SFAS No. 141-R
is to improve the relevance, representational faithfulness and comparability
of
the information that a reporting entity provides in its financial reports about
a business combination. SFAS No, 141-R changes the requirements for an
acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. 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
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment to ARB
No.51.
SFAS
No. 160 requires that (i) noncontrolling (minority) interests be reported as
a
component of shareholders’ equity, (ii) net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated
statement of operations, (iii) changes in a parent’s ownership interest while
the parent retains its controlling interest be accounted for as equity
transactions, (iv) any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value, and (v)
sufficient disclosures are provided that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No.160 is effective for annual periods beginning after December
15,
2008. 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.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities”
(“SFAS
161”). SFAS 161 enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding
of
(i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. 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.
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 Quarterly Report on Form 10-Q (including the section
titled Management’s Discussion and Analysis of Financial Condition and Results
of Operations) 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 iDNA or iDNA’s 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 iDNA’s 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 iDNA’s actual results as well as those of the markets it serves, 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. iDNA undertakes 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 rate, exchange
rates, commodity prices, equity prices and other market changes.
iDNA
does
not engage in trading activities, does not utilize interest rate swaps or other
derivative financial instruments and does not 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
April 30, 2008, the interest rates under iDNA’s long term and convertible debt,
exclusive of the Term Loan, are fixed. As a result iDNA has limited market
risk
associated with market interest rates. The interest rate attributable to the
Term Loan is a variable annual rate based upon the prime rate, as published
by
Citibank N.A. (“Prime Rate”) plus 4%, or, if greater, 12.25%. As a consequence,
iDNA’s interest charges under the Term Loan are subject to fluctuations based
upon changes in the credit markets and the corresponding Prime Rate. For each
1%
increase in the Prime Rate above 8.25%, iDNA’s interest costs under the Term
Loan would increase approximately $42,000 per annum. At April 30, 2008, the
Prime Rate was 5.0%.
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
Securities and Exchange 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 iDNA’s most recent fiscal quarter. In compliance with Rules 13a-14(a) and
15d-14(a) under the Exchange Act and 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.
In
accordance with Rules 13a-15(d) and 15d-15(d) of the Exchange Act, 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
iDNA’s internal control over financial reporting during its most recent fiscal
quarter covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, iDNA’s 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 April 30, 2008 and January 31, 2008 was
$157,000 and $172,000, 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.
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
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 with the SEC 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 with the SEC on November 4, 2005, SEC File No.
1-11601).
|
N/A
|
|
|
|
|
|
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 with the SEC 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 with the SEC on April 25, 1996, SEC
File No. 1-11601).
|
N/A
|
|
|
|
|
|
4.3
|
Rights
Agreement, dated as of September 26, 2001,
by and between the
Company and American Stock Transfer & Trust Company, including
the form of Certificate of Designation, Preferences and
Rights for the Series D Junior Participating Preferred Stock attached
as Exhibit “A”, the form of Rights Certificate attached as Exhibit
“B” and the Summary of Rights to Purchase Preferred Stock
attached as Exhibit “C” (incorporated by reference to Exhibit
4.1 to the Company’s Current Report on Form 8-K, filed
with the SEC 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, As adopted pursuant to Section 302
of the Sarbanes-Oxley Act |
40
|
|
|
|
|
|
31.2 |
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
of the
Securities Exchange Act of 1934,As adopted pursuant to Section 302
of the
Sarbanes-Oxley Act |
41
|
|
|
|
|
|
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 |
42
|
|
|
|
|
|
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 |
43
|
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:
June
16,
2008
|
By: |
/s/ James
J.
McNamara
|
|
James J. McNamara
Chairman
of the Board and Chief Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
|
Date:
June
16,
2008
|
By: |
Robert
V. Cuddihy,
Jr.
|
|
Robert V. Cuddihy, Jr.
Chief
Financial Officer, Secretary and Treasurer
(principal
accounting and financial officer)
|
|
|