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 AND EXCHANGE
ACT
OF 1934
|
FOR
THE PERIOD ENDING SEPTEMBER 30, 2008
|
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT
OF 1934
|
|
FOR
THE TRANSITION PERIOD FROM _________ TO
_________
|
COMMISSION
FILE NUMBER
0 – 1325
|
MULTIBAND
CORPORATION
(Exact
name of registrant as specified in its charter)
MINNESOTA
(State
or
other jurisdiction of incorporation or organization)
41 - 1255001
(IRS
Employer Identification No.)
9449
Science Center Drive, New Hope, Minnesota 55428
(Address
of principal executive offices)
Telephone
(763) 504-3000 Fax (763) 504-3060
Internet: www.multibandusa.com
(Registrant's
telephone number, facsimile number, and Internet address)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer“ and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated
filer x
(do not
check if a smaller reporting company) Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
On
November 10, 2008 there were 9,632,305 shares outstanding of the registrant's
common stock, no par value, and 297,375 outstanding shares of the registrant's
convertible preferred stock.
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
12,340,659
|
|
$
|
3,653,600
|
|
$
|
28,860,595
|
|
$
|
11,960,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services (exclusive of depreciation and amortization
shown
separately below)
|
|
|
8,556,168
|
|
|
2,345,895
|
|
|
18,769,937
|
|
|
6,395,179
|
|
Selling,
general and administrative
|
|
|
2,757,319
|
|
|
2,360,254
|
|
|
7,173,357
|
|
|
7,057,936
|
|
Depreciation
and amortization
|
|
|
846,317
|
|
|
770,215
|
|
|
2,463,079
|
|
|
2,814,981
|
|
Impairment
of assets
|
|
|
-
|
|
|
-
|
|
|
65,452
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
12,159,804
|
|
|
5,476,364
|
|
|
28,471,825
|
|
|
16,268,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
180,855
|
|
|
(1,822,764
|
)
|
|
388,770
|
|
|
(4,307,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(300,826
|
)
|
|
(108,847
|
)
|
|
(514,485
|
)
|
|
(430,264
|
)
|
Management
consulting income
|
|
|
1,446,938
|
|
|
-
|
|
|
1,446,938
|
|
|
-
|
|
Other
income
|
|
|
8,109
|
|
|
13,267
|
|
|
80,699
|
|
|
177,361
|
|
Total
other income (expense)
|
|
|
1,154,221
|
|
|
(95,580
|
)
|
|
1,013,152
|
|
|
(252,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST IN
SUBSIDIARY
|
|
|
1,335,076
|
|
|
(1,918,344
|
)
|
|
1,401,922
|
|
|
(4,560,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
286,658
|
|
|
-
|
|
|
749,458
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST IN NET INCOME OF SUBSIDIARY
|
|
|
137,755
|
|
|
-
|
|
|
549,758
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
910,663
|
|
|
(1,918,344
|
)
|
|
102,706
|
|
|
(4,560,718
|
)
|
Preferred
stock dividends
|
|
|
64,014
|
|
|
1,793,297
|
|
|
4,048,696
|
|
|
2,153,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
846,649
|
|
$
|
(3,711,641
|
)
|
$
|
(3,945,990
|
)
|
$
|
(6,714,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE -
BASIC
|
|
$
|
.09
|
|
$
|
(.50
|
)
|
$
|
(.43
|
)
|
$
|
(.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE -
DILUTED
|
|
$
|
.09
|
|
$
|
(.50
|
)
|
$
|
(.43
|
)
|
$
|
(.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
9,561,718
|
|
|
7,356,413
|
|
|
9,184,475
|
|
|
7,177,435
|
|
Weighted
average shares outstanding – diluted
|
|
|
9,796,685
|
|
|
7,356,413
|
|
|
9,184,475
|
|
|
7,177,435
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September
30,
2008
|
|
September
30,
2007
|
|
September
30,
2008
|
|
September
30,
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
910,663
|
|
$
|
(1,918,344
|
)
|
$
|
102,706
|
|
$
|
(4,560,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS), NET OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains(losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains(losses) arising during period
|
|
|
-
|
|
|
-
|
|
|
151,978
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
910,663
|
|
$
|
(1,918,344
|
)
|
$
|
254,684
|
|
$
|
(4,560,718
|
)
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,092,373
|
|
$
|
944,456
|
|
Accounts
receivable, net
|
|
|
3,340,501
|
|
|
1,560,123
|
|
Securities
available for sale
|
|
|
151,978
|
|
|
-
|
|
Inventories
|
|
|
2,128,393
|
|
|
132,992
|
|
Prepaid
expenses and other
|
|
|
343,280
|
|
|
135,589
|
|
Current
portion of notes receivable
|
|
|
61,418
|
|
|
59,861
|
|
Total
Current Assets
|
|
|
17,117,943
|
|
|
2,833,021
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
1,306,054
|
|
|
1,769,261
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
116,757
|
|
|
16,757
|
|
Intangible
assets, net
|
|
|
5,107,154
|
|
|
4,072,076
|
|
Notes
receivable – long-term, net
|
|
|
38,856
|
|
|
-
|
|
Other
assets
|
|
|
455,432
|
|
|
202,314
|
|
Total
Other Assets
|
|
|
5,718,199
|
|
|
4,291,147
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
24,142,196
|
|
$
|
8,893,429
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Mandatory
redeemable preferred stock, 16,200 and 22,026 Class F preferred
shares
|
|
$
|
162,000
|
|
$
|
220,256
|
|
Current
portion of long-term debt
|
|
|
1,644,633
|
|
|
1,658,342
|
|
Current
portion of capital lease obligations
|
|
|
244,354
|
|
|
225,291
|
|
Accounts
payable
|
|
|
8,466,643
|
|
|
2,950,596
|
|
Accrued
liabilities – short term
|
|
|
3,179,204
|
|
|
2,531,611
|
|
Customer
deposits
|
|
|
60,582
|
|
|
60,582
|
|
Deferred
service obligations and revenue
|
|
|
985,232
|
|
|
204,520
|
|
Total
Current Liabilities
|
|
|
14,742,648
|
|
|
7,851,198
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
|
807,943
|
|
|
118,924
|
|
Capital
lease obligations, net of current portion
|
|
|
149,796
|
|
|
249,469
|
|
Accrued
liabilities – long term
|
|
|
74,243
|
|
|
-
|
|
Total
Liabilities
|
|
|
15,774,630
|
|
|
8,219,591
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
3,387,917
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock, no par value:
|
|
|
|
|
|
|
|
8%
Class A (21,328 and 24,728 shares issued and outstanding, $223,944
and
$259,644 liquidation preference)
|
|
|
320,708
|
|
|
371,708
|
|
10%
Class B (2,870 and 3,770 shares issued and outstanding, $30,135 and
$39,585 liquidation preference)
|
|
|
28,700
|
|
|
37,700
|
|
10%
Class C (114,380 and 120,250 shares issued and outstanding, $1,143,800
and
$1,202,500 liquidation preference)
|
|
|
1,486,082
|
|
|
1,548,352
|
|
10%
Class F (150,000 shares issues and outstanding, $1,500,000 liquidation
preference)
|
|
|
1,500,000
|
|
|
1,500,000
|
|
8%
Class G (11,595 and 26,595 shares issued and outstanding, $115,950
and
$265,950 liquidation preference)
|
|
|
47,970
|
|
|
111,468
|
|
6%
Class H (2.0 shares issued and outstanding, $200,000 liquidation
preference)
|
|
|
-
|
|
|
-
|
|
Variable
rate % Class I (0 and 39,500 shares issued and outstanding, $0 and
$3,950,000 liquidation preference)
|
|
|
-
|
|
|
-
|
|
Common
stock, no par value (9,603,294 and 7,451,891 shares issued and
outstanding)
|
|
|
37,614,598
|
|
|
29,574,673
|
|
Stock
subscriptions receivable
|
|
|
(98,453
|
)
|
|
(170,888
|
)
|
Options
and warrants
|
|
|
46,024,617
|
|
|
45,871,964
|
|
Accumulated
comprehensive income – unrealized gain on securities available for
sale
|
|
|
151,978
|
|
|
-
|
|
Accumulated
deficit
|
|
|
(82,096,551
|
)
|
|
(78,171,139
|
)
|
Total
Stockholders' Equity
|
|
|
4,979,649
|
|
|
__
_673,838
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
24,142,196
|
|
$
|
8,893,429
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
102,706
|
|
$
|
(4,560,718
|
)
|
Adjustments
to reconcile net income (loss) to net cash flows from operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,463,079
|
|
|
2,829,277
|
|
Minority
interest in net income of consolidated subsidiary
|
|
|
549,758
|
|
|
-
|
|
Impairment
of intangibles
|
|
|
65,452
|
|
|
-
|
|
Amortization
of original issue discount
|
|
|
-
|
|
|
29,746
|
|
Amortization
of imputed interest discount
|
|
|
218,912
|
|
|
-
|
|
Loss
on sale of property and equipment and intangible assets
|
|
|
51,807
|
|
|
150,582
|
|
Warrants
issued for services
|
|
|
-
|
|
|
42,300
|
|
Gain
on debt extinguishment
|
|
|
(29,965
|
)
|
|
(118,040
|
)
|
Stock
based compensation expense for future services
|
|
|
152,653
|
|
|
549,434
|
|
Stock
based compensation expense for services
|
|
|
18,555
|
|
|
-
|
|
Compensation
expense of restricted stock awards
|
|
|
23,625
|
|
|
-
|
|
Management
consulting income from DirecTECH
|
|
|
(1,446,938
|
)
|
|
-
|
|
Change
in allowance for doubtful accounts on accounts receivable
|
|
|
(15,000
|
)
|
|
(97,500
|
)
|
Change
in reserve for stock subscriptions and interest receivable
|
|
|
8,102
|
|
|
45,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
887,553
|
|
|
373,588
|
|
Inventories
|
|
|
220,666
|
|
|
191,933
|
|
Prepaid
expenses and other
|
|
|
(52,275
|
)
|
|
182,272
|
|
Other
assets
|
|
|
120,527
|
|
|
(13,051
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(228,829
|
)
|
|
(320,485
|
)
|
Customer
deposits
|
|
|
-
|
|
|
(750
|
)
|
Deferred
service obligations and revenue
|
|
|
780,712
|
|
|
(591,000
|
)
|
Liabilities
of discontinued operations
|
|
|
-
|
|
|
(125,000
|
)
|
Net
cash flows from (used by) operating activities
|
|
|
3,891,100
|
|
|
(1,432,412
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(112,253
|
)
|
|
(271,588
|
)
|
Cash
acquired via purchase of Michigan Microtech, Inc.
|
|
|
4,043,942
|
|
|
-
|
|
Cash
collected on other receivables – related parties acquired via the purchase
of Michigan Microtech, Inc.
|
|
|
2,815,488
|
|
|
-
|
|
Purchase
of US Install
|
|
|
(101,000
|
)
|
|
-
|
|
Proceeds
from sale of property and equipment and intangible assets
|
|
|
5,695
|
|
|
2,639,869
|
|
Collections
on notes receivable
|
|
|
4,601
|
|
|
4,802
|
|
Net
cash flows from investing activities
|
|
|
6,656,473
|
|
|
2,373,083
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Checks
issued in excess of cash in bank
|
|
|
-
|
|
|
(319,244
|
)
|
Payments
on long-term debt
|
|
|
(83,683
|
)
|
|
(146,405
|
)
|
Payments
on capital lease obligations
|
|
|
(152,241
|
)
|
|
(191,405
|
)
|
Payments
on note payable to stockholder
|
|
|
-
|
|
|
(24,739
|
)
|
Payments
on mandatory redeemable preferred stock
|
|
|
(58,256
|
)
|
|
(52,744
|
)
|
Payments
for stock issuance costs
|
|
|
(25,379
|
)
|
|
(25,916
|
)
|
Payments
received on stock subscriptions receivable
|
|
|
3,000
|
|
|
62
|
|
Proceeds
from issuance of long term debt
|
|
|
100,000
|
|
|
-
|
|
Redemption
of preferred stock
|
|
|
(101,700
|
)
|
|
(77,099
|
)
|
Preferred
stock dividends
|
|
|
(81,397
|
)
|
|
(40,217
|
)
|
Net
cash flows used by financing activities
|
|
|
(399,656
|
)
|
|
(877,707
|
)
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
10,147,917
|
|
|
62,964
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
944,456
|
|
|
1,020,975
|
|
End
of period
|
|
$
|
11,092,373
|
|
$
|
1,083,939
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for interest, net of amortization of original issue discount
and
imputed interest discount
|
|
$
|
198,749
|
|
$
|
411,477
|
|
Cash
paid for federal and state income taxes
|
|
|
681,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Conversion
of Class I preferred stock into common stock
|
|
|
3,744,600
|
|
|
-
|
|
Conversion
of Class G preferred stock into common stock
|
|
|
150,000
|
|
|
-
|
|
Conversion
of accrued interest into common stock
|
|
|
2,000
|
|
|
15,680
|
|
Conversion
of accrued dividends into common stock
|
|
|
175,412
|
|
|
534,879
|
|
Intrinsic
value of preferred dividends
|
|
|
84,068
|
|
|
13,884
|
|
Purchase
of property and equipment via increase of capital lease
obligations
|
|
|
46,867
|
|
|
-
|
|
Purchase
of US Install via increase in accrued expenses
|
|
|
102,516
|
|
|
-
|
|
Acquisition
of securities available for sale upon expiration of contingent
rights
|
|
|
208,969
|
|
|
-
|
|
Reduction
of stock subscription receivable via cancellation of common
stock
|
|
|
61,333
|
|
|
-
|
|
Debt
and accrued interest paid with issuance of common stock
|
|
|
19,500
|
|
|
-
|
|
Purchase
of 51% of Michigan Microtech, Inc. via issuance of notes payable
and
common stock, net of discount for imputed interest
|
|
|
5,782,690
|
|
|
-
|
|
Sale
of property, equipment and intangible to DirecTECH for other current
asset
|
|
|
-
|
|
|
|
|
Debt
reduced by reduction in other receivable from DirecTECH
|
|
|
1,446,938
|
|
|
-
|
|
Conversion
of preferred stock into common stock
|
|
|
-
|
|
|
1,706,400
|
|
Notes
payable and other liens paid by MDUC as part of asset sale
|
|
|
-
|
|
|
1,713,785
|
|
Debt
and interest assumed by DirecTECH as part of asset sale
|
|
|
-
|
|
|
267,143
|
|
Common
stock issued for services to be rendered
|
|
|
157,500
|
|
|
164,337
|
|
Note
payable issued for services to be rendered
|
|
|
-
|
|
|
44,407
|
|
See
notes
to condensed consolidated financial statements
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
NOTE
1 - Unaudited Consolidated Financial Statements
The
information furnished in this report is unaudited and reflects all adjustments
which are normal recurring adjustments and, which in the opinion of management,
are necessary to fairly present the operating results for the interim periods.
The operating results for the interim periods presented are not necessarily
indicative of the operating results to be expected for the full fiscal year.
The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007,
previously filed with the Securities and Exchange Commission.
NOTE
2 - Summary of Significant Accounting Policies
Nature
of Business
Multiband
Corporation and subsidiaries (the Company) was incorporated in Minnesota in
September 1975. The Company provides voice, data and video services to
multi-dwelling unit customers and provides video services to single family
home
customers. The Company's products and services are sold to customers located
throughout the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern that contemplates the realization
of
assets and satisfaction of liabilities in the normal course of business. For
the
nine months ended September 30, 2008, the Company earned net income of $102,706
versus the nine months ended September 30, 2007 in which the Company incurred
a
net loss of $4,560,718. At September 30, 2008, the Company had an accumulated
deficit of $82,096,551. The Company's ability to continue as a going concern
is
dependent on it ultimately achieving profitability and/or raising additional
capital. Management intends to sell certain assets on a strategic basis for
prices agreeable to the Company and/or obtain additional debt or equity capital
to meet all of its existing cash obligations and fund commitments on planned
Multiband projects; however, there can be no assurance that the sources will
be
available or available on terms favorable to the Company. Management anticipates
that the impact of the actions listed below will generate sufficient cash flows
to pay current liabilities, long-term debt and capital and operating lease
obligations and fund the Company's future operations for the next twelve
months:
|
1.
|
Reduction
of operating expenses by controlling payroll, professional fees
and other
general and administrative
expenses.
|
|
2.
|
Sale
of video assets on a strategic basis. The Company, based on recent
transactions, believes there is an active market for its video
subscriber
assets. The Company believes it can sell these assets, under certain
circumstances, at prices at or above their current carrying value.
However, there is no guarantee these sales will ultimately be favorable
to
the Company.
|
|
3.
|
Solicit
additional equity investment in the Company by either issuing preferred
or
common stock.
|
|
4.
|
Continue
to market Multiband services and acquire additional multi-dwelling
unit
customers.
|
|
5.
|
Control
capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment
program.
|
|
6.
|
Delivery
of video services to residents of single family homes. Effective
March 1,
2008, the Company purchased 51% of the outstanding stock of Michigan
Microtech, Inc. (MMT), formerly a wholly owned subsidiary of DirecTECH
Holding Company Inc. (DTHC) (see Note 4 and Note 13). MMT installs
DirecTV
video services in single family homes. Historically MMT has been
profitable. The Company anticipates that by combining MMT operations
with
Multiband operations that it will achieve a beneficial impact to
its
consolidated cash flows and operating results. However, there is
no
guarantee that these combined results will ultimately be favorable
to the
Company.
|
|
7.
|
Expansion
of call center support via sales of call center services to both
existing
and future system operators and to buyers of the Company’s video
subscribers.
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
Principles
of Consolidation
The
consolidated financial statements include the accounts of Multiband Corporation
(MB) and its wholly owned subsidiaries, Minnesota Digital Universe, Inc. (MDU),
Rainbow Satellite Group, LLC (Rainbow), Multiband Subscriber Services, Inc.
(MBSS), and Multiband USA, Inc. (MBUSA). Effective March 1, 2008, the Company
acquired 51% of the outstanding shares of Michigan Microtech, Inc. (MMT) (see
Note 4). The minority interest on the consolidated balance sheet and statement
of operations represents DTHC’s 49% ownership of MMT. The consolidated financial
statements include the accounts of MMT. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Securities Exchange
Commission’s Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”,
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectability is reasonably assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue as products are shipped based on FOB shipping point terms
when title passes to customers.
The
Company earns revenues from four sources: 1) Voice, video and data
communications products which are sold and installed, 2) MBSS user charges
to
multiple dwelling units, 3) MDU earns revenue primarily through the activation
of, enhancement of, and residual fees on video programming services provided
to
residents of multiple dwelling units; and 4) MMT earns revenue primarily through
the installation and service of DirecTV (DTV) video programming for residents
of
single family homes.
Customers
contract for both the purchase and installation of voice and data networking
technology products and certain video technologies products. Revenue is
recognized when the products are delivered and installed and the customer has
accepted and has the ability to fulfill the terms of the contract.
Revenue
generated from activation of video programming services is earned in the month
of activation. According to Multiband's Master System Operator agreement with
DirecTV, in the event that a customer cancels within the first 12 months of
service, DirecTV has the right to chargeback the Company for a portion of the
activation fees received. In accordance with Securities Exchange Commission
SAB
104, the Company has estimated the potential charge back of commissions received
on activation fees during the past 12 months based on historical percentages
of
customer cancellations and has included that amount as a reduction of revenue.
Residual income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services,
a variable amount depending on the number of activations in a given month,
and a
variable amount for coordinating improvements of systems used to deliver
enhanced programming services. The Company’s master system operator contract
with DirecTV also permits the Company to earn revenues through its control
of
other system operators who are unable to provide DirecTV video programming
services without the Company’s performance.
MMT
has a
home services provider (HSP) agreement with DirecTV which allows MMT to install
and activate DTV video programming services for residents of single family
homes. As a DirecTV HSP, MMT earns revenue for installing and servicing DTV
video customers pursuant to predetermined rates set by DirecTV which may vary
from time to time. Revenue
is recognized upon completion of the delivery and installation of
equipment.
The
Company reports the aforementioned voice, data, and video revenues on a gross
basis based on the following factors: the Company has the primary obligation
in
the arrangement with its customers; the Company controls the pricing of its
services; the Company performs customer service for the agreements; the Company
approves customers; and the Company assumes the risk of payment for services
provided.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
We
offer
some products and services that are provided by third party vendors. We review
the relationship between us, the vendor and the end customer on an individual
basis to assess whether revenue should be reported on a gross or net basis.
As
an example, our resold satellite digital television revenue is reported on
a net
basis.
The
Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards
Board
Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as
a Principal versus Net as an Agent”. EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such
expenses.
In
June
2006, the Financial Accounting Standards Board (FASB) ratified the consensus
of
Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF 06-3
concluded that the presentation of taxes imposed on revenue-producing
transactions (sales, use, value added and excise taxes) on either a gross
(included in revenues and costs) or a net (excluded from revenues) basis is
an
accounting policy that should be disclosed. The Company’s policy is to present
taxes imposed on revenue-producing transactions on a net basis.
Revenue
generated by the support center to service third party subscribers by providing
billing and call center support services is recognized in the period the related
services are provided.
MBSS,
Rainbow, MDU and MBUSA user charges are recognized as revenues in the period
the
related services are provided in accordance with SAB 104. Any amounts billed
prior to services being provided are reported as deferred service obligations
and revenues. MMT installation and services revenues are recognized in the
period the related services are provided in accordance with SAB
104.
Goodwill
and Other Intangible Assets
We
periodically evaluate goodwill and other intangible and long-lived assets for
potential impairment indicators. Our judgments regarding the existence of
impairment indicators are based on legal factors, market conditions and
operational performance of our business segments. Future events could cause
us
to conclude that impairment indicators exist and that goodwill and other
intangible and long-lived assets are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results
of
operations. Goodwill was $116,757 and $16,757 at September 30, 2008 and December
31, 2007, respectively, and is recorded as part of our Multiband Corp. and
MCS
segments. The increase in goodwill during 2008 is due to the purchase US Install
(see Note 4).
Due
to
the abandonment of a right of entry intangible asset, the Company recorded
an
impairment charge of $0 and $65,452 for the three and nine months ended
September 30, 2008. This charge was determined based upon the net book value
of
assets to be abandoned.
Components
of intangible assets are as follows:
|
|
September
30, 2008
|
|
December
31, 2007
|
|
|
|
Gross
Carrying
|
|
Accumulated
|
|
Gross
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right
of entry contracts
|
|
$
|
800,741
|
|
$
|
503,735
|
|
$
|
993,393
|
|
$
|
618,027
|
|
Contracts
with DirecTV
|
|
|
12,547,145
|
|
|
7,714,260
|
|
|
9,697,879
|
|
|
6,001,169
|
|
Customer
contracts
|
|
|
102,516
|
|
|
59,801
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,450,402
|
|
|
8,277,796
|
|
|
10,691,272
|
|
|
6,619,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of intangibles
|
|
|
-
|
|
|
65,452
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
including impairment
|
|
$
|
13,450,402
|
|
$
|
8,343,248
|
|
$
|
10,691,272
|
|
$
|
6,619,196
|
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
Amortization
of intangible assets was $668,544 and $519,519 for the three months ended
September 30, 2008 and 2007, respectively. For the nine months ended September
30, 2008 and 2007, amortization of intangible assets was $1,851,250 and
$1,829,272, respectively. Amortization of debt issuance costs of $0 and $7,986
for the nine months ended September 30, 2008 and 2007, respectively, is included
in interest expense. Estimated amortization expense of intangible assets for
the
remainder of the year ending December 31, 2008 and for the years ending December
31, 2009, 2010, 2011, 2012 and thereafter is $669,036, $2,537,421, $1,464,137,
$336,190, $36,267, $64,102, respectively. The weighted average remaining life
of
the intangibles is 2.22 years with right of entry average life of 5.77 years,
contracts with DirecTV of 2.06 years and customer contracts of .42 years as
of
September 30, 2008.
Share-Based
Compensation
The
Company recognizes share-based compensation costs on a straight-line basis
over
the requisite service period of the award, which is generally the option vesting
term. For the three months ended September 30, 2008 total share-based
compensation expense of ($209,474) (($.02) per share) was recorded as a
reduction to selling, general and administrative expenses due to a change in
accounting estimates related to black scholes assumptions. For the three months
ended September 30, 2007, total share-based compensation expense of $158,001
($.02 per share) was included in selling, general and administrative expenses,
respectively. For the nine months ended September 30, 2008 and 2007, total
share-based compensation expense of $152,652 ($.02 per share) and $549,434
($.08
per share) was included in selling, general and administrative expenses,
respectively.
As
of
September 30, 2008, there was $68,773 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period
of
1.66 years. This is an estimate based on options currently outstanding and
therefore this projected expense could be more in the future.
In
determining the compensation cost of the options granted during the three and
nine months ended September 30, 2008 and 2007, as specified by SFAS No. 123R,
the fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model and the weighted average
assumptions used in these calculations are summarized as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Risk-free
interest rate
|
|
|
3.15
|
%
|
|
4.50
|
%
|
|
3.15
|
%
|
|
4.58
|
%
|
Expected
life of options granted
|
|
|
6.5
Years
|
|
|
10
Years
|
|
|
6.5
Years
|
|
|
10
Years
|
|
Expected
volatility range
|
|
|
95
|
%
|
|
236
|
%
|
|
94
|
%
|
|
236
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
The
Company’s determination of fair value of share-based payment awards on the date
of grant using an option-pricing model is affected by the Company’s stock price
as well as assumptions regarding a number of variables. These variables include,
but are not limited to the Company’s expected stock price volatility, and actual
and projected stock option exercise behaviors and forfeitures. During the
quarter ended September 30, 2008, the Company evaluated the variables used
in
calculating its option values. The Company has recorded a change in accounting
estimate based on this assessment.
In
May
2008, the Company issued 22,500 shares of restricted stock in the amount of
$23,625 to two officers of the Company. The value of the restricted stock was
established by the market price on the date of grant. These restricted shares
were immediately vested and were issued as performance bonuses pursuant to
the
Company’s Employee Stock Compensation Plan.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
Net
Income (Loss) per Common Share
Basic
net
income (loss) per common share is computed by dividing the income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the reporting period. Diluted income (loss) per common
share is computed by dividing loss attributable to common stockholders by the
sum of the weighted average number of common shares outstanding plus all
additional common stock that would have been outstanding if potentially dilutive
common shares related to common share equivalents (stock options, stock
warrants, convertible preferred shares, and issued but not outstanding
restricted stock) had been issued. All options, warrants, convertible preferred
shares, and restricted stock outstanding during the nine months ended September
30, 2008 and the three and nine months ended September 30, 2007 were excluded
from the calculation of diluted loss per share as their effects were
anti-dilutive due to the Company’s net losses for the periods. The three months
ended September 30, 2008 accounted for dilutive options, warrants, preferred
shares, and restricted stock. There were 2,138,244 shares of anti-dilutive
shares related to options and warrants that were not included in the denominator
for diluted earnings per share.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Numerator:
Income (loss) attributable to common stockholders
|
|
$
|
846,649
|
|
$
|
(3,711,641
|
)
|
$ |
(3,945,990
|
)
|
$
|
(6,714,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
9,561,718
|
|
|
7,356,413
|
|
|
9,184,475
|
|
|
7,177,435
|
|
Effect
of dilutive securities
|
|
|
234,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Denominator
for diluted earnings per share
|
|
|
9,796,685
|
|
|
7,356,413
|
|
|
9,184,475
|
|
|
7,177,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
.09
|
|
$
|
(.50
|
)
|
$
|
(.43
|
)
|
$
|
(.94
|
)
|
Diluted
earnings (loss) per share
|
|
$
|
.09
|
|
$
|
(.50
|
)
|
$
|
(.43
|
)
|
$
|
(.94
|
)
|
Segment
Reporting
A
business segment is a distinguishable component of an enterprise that is engaged
in providing an individual product or service or a group of related products
or
services and that is subject to risks and returns that are different from those
of other business segments. Management believes that the Company has three
operating segments, MCS, where the Company bills voice, data and video
subscribers as a principal; MDU where the Company, as a master service operator
for DirecTV, receives net cash payments for managing video subscribers through
its network of system operators and HSP (Home Service Provider), where the
Company receives net cash payments for the installation and service of DirecTV
(DTV) video programming for residents of single family homes. These video
subscribers are billed by DirecTV.
NOTE
3 –
Sales Transactions
Effective
March 1, 2007, the Company, pursuant to an asset purchase agreement entered
into
October 19, 2006 (the “agreement”), completed the sale of substantially all of
its video assets located in California to Consolidated Smart Broadband Systems,
LLC (CSBS). The purchase price paid by CSBS was $1,214,000 at closing plus
an
additional $100,000, paid on March 30, 2007 consisting of cash proceeds of
$757,731 and direct payments to lenders of $556,269 (including $22,338 of
imputed interest).
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company classified the assets as held for sale, and
recorded an impairment charge for the year ended December 31, 2006, that was
determined based upon the excess net book value of assets sold over the known
proceeds from the sale. Any consideration received for the assets during future
accounting periods based upon the earnout formula will be recognized as a gain
on sale of assets in that period. The results of the sale of the California
assets resulted in a loss of $40,110, which is included in the selling, general
and administrative expenses of the accompanying consolidated statements of
operations for the three months ended March 31, 2007.
Effective
March 31, 2007, the Company completed the sale of substantially all of its
video
assets located in Ohio to DirecTECH MDU (Dtech). The purchase price paid by
Dtech was $745,790. The purchase price consisted of the assumption of a note
payable for the gross value of $329,036 and $416,754 cash paid at closing on
April 20, 2007. The sale of the Ohio assets resulted in a gain on sale in the
amount of $324,626, which is included in the selling, general and administrative
expenses during the three months ended March 31, 2007. The proceeds of $683,897,
including assumed liabilities of $267,143, less the net book value of the MCS
segment assets sold amounted to a gain on sale of $324,626.
On
October 16, 2007, the Company completed the sale to MDU Communications (MDUC)
of
approximately 9,800 subscriptions and the related assets located in 181
multi-family properties located throughout Florida, Illinois, New York,
Colorado, New Jersey, and Texas. Total proceeds for MCS assets sold amounted
to
approximately $3,325,000, consisting of cash proceeds of $1,476,753, selling
expenses paid by MDUC of $135,000 and the remainder on debt and liabilities
paid
directly by MDUC. The sale resulted in a loss of $461,687 which is included
in
the selling, general and administrative expenses of the consolidated statements
of operations for the year ended December 31, 2007. The aforementioned loss
primarily resulted from fewer multi-family properties being sold to MDUC than
was originally intended in the party’s asset purchase agreement. Certain
properties could not be sold due to the Company’s inability to obtain some
property owners consent to assignment. The difference in the mix of properties
ultimately transferred to MDUC increased the loss on sale compared to what
the
Company originally estimated upon execution of the asset purchase agreement
in
July 2007.
These
sales were not reported as a discontinued operation because the assets sold
did
not constitute a segment or component of the Company’s business, and the Company
retained assets and on-going service rights associated with the video
subscribers.
NOTE
4 –
Business Acquisitions
Effective
March 1, 2008, the Company purchased, pursuant to a Supplemental Agreement
and
Plan of Share Exchange, 51% of the outstanding shares of Michigan Microtech,
Inc. (MMT), previously a wholly owned subsidiary of DirecTECH Holding Company,
Inc. (DTHC) which equaled 1,020,000 MMT common shares. The consideration paid
for the shares was 1,490,000 shares of restricted Multiband common stock valued
at $3,854,000 and a promissory note for $2,246,000. The note is secured by
the
aforementioned MMT common shares, which carries a stated interest rate of 5%
per
annum and is due February 2013. The Multiband shares, via negotiation and mutual
agreement between buyer and seller, were valued at $2.59 per share. The seller
received certain piggyback registration rights with regards to the Multiband
shares. The note payable was recorded net of a discount for imputed interest
of
3% which amortizes monthly as part of interest expense. The total discount
for
imputed interest amounted to $317,310. The Company purchased MMT to enter the
market of installing video services in single family homes. The Company, on
a
preliminary and unaudited basis, allocated the purchase price to the fair values
of MMT assets and liabilities. As part of the acquisition, the Company
recognized an intangible asset of $2,849,266 related to MMT’s HSP agreement with
DirecTV. The Company will amortize this intangible over the remaining 38 month
term of MMT’s home services provided contract with DirecTV. The term of the
contract will automatically renew as of April 30, 2011 for additional one year
periods unless either MMT or DirecTV gives written notice of termination at
least 90 days in advance of expiration of the then current term. Also, all
signing parties to the October 31, 2007 Plan of Merger Agreement involving
Multiband Corporation and DirecTECH Holding Company, Inc. have agreed to extend
the time to reach a definitive agreement in the matter from March 31, 2008
to
December 31, 2008. Subsequently, in November, 2008, Multiband and DTHC entered
into a stock purchase agreement (SPA) which superceded the aforementioned Plan
of Merger Agreement. (See Note 13)
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
Effective
March 1, 2008, the Company purchased 100% of the assets of US Install LLC in
exchange for $95,000 in cash plus 37,879 shares of restricted Multiband common
stock valued at $102,516, which is included in accrued liabilities on the
consolidated balance sheet and was subsequently issued in October, 2008. The
Company also incurred acquisition expense of $1,000 related to this purchase.
In
addition, the parties executed employment agreements with US Install’s two
principals. The parties also executed noncompetition and nonsolicitation
agreements with each principal in exchange for cash consideration of $2,500
per
agreement. The Company allocated the purchase price as follows:
Intangible
assets
|
|
$
|
102,516
|
|
Goodwill
|
|
|
100,000
|
|
Total
assets acquired
|
|
|
202,516
|
|
Proceeds
for the acquisition were obtained via an unsecured promissory note in the amount
of $100,000 between Multiband and Bas Mattingly Master, LLC, a trust controlled
by J. Bas Mattingly, chairman of DTHC, with DTHC as a 49% owner of MMT. The
note
carries an interest rate of 7% per annum and is due August 20, 2009. The Company
purchased US Install LLC to diversify its revenue sources.
The
unaudited pro forma information does not purport to represent what the Company’s
results of operations would actually have been if such transactions in fact
had
occurred at such date or to project the Company’s results of future
operations.
|
|
2007
Consolidated
as reported
|
|
2007
Pro Forma
Disclosed
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,653,600
|
|
$
|
10,622,338
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,822,764
|
)
|
|
(1,511,477
|
)
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(1,918,344
|
)
|
|
(1,732,972
|
)
|
Preferred
dividends
|
|
|
1,793,297
|
|
|
1,793,297
|
|
Loss
attributable to common shareholders
|
|
$
|
(3,711,641
|
)
|
$
|
(3,526,269
|
)
|
|
|
|
|
|
|
|
|
Loss
attributable to common shareholders per common share– basic and
diluted
|
|
$
|
(.50
|
)
|
$
|
(.40
|
)
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
7,356,413
|
|
|
8,846,413
|
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
|
|
2008
Consolidated
as reported
|
|
2008
Pro Forma
Disclosed
|
|
2007
Consolidated
as reported
|
|
2007
Pro Forma
Disclosed
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,860,595
|
|
$
|
33,260,475
|
|
$
|
11,960,281
|
|
$
|
30,236,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
388,770
|
|
|
592,305
|
|
|
(4,307,815
|
)
|
|
(5,317,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
102,706
|
|
|
246,029
|
|
|
(4,560,718
|
)
|
|
(5,312,504
|
)
|
Preferred
stock dividends
|
|
|
4,048,696
|
|
|
4,048,696
|
|
|
2,153,698
|
|
|
2,153,698
|
|
Loss
attributable to common shareholders
|
|
$
|
(3,945,990
|
)
|
$
|
(3,802,667
|
)
|
$
|
(6,714,416
|
)
|
$
|
(7,466,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
attributable to common shareholders per common share – basic and
diluted
|
|
$
|
(.43
|
)
|
$
|
(.41
|
)
|
$
|
(.94
|
)
|
$
|
(.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
9,184,475
|
|
|
9,353,051
|
|
|
7,177,435
|
|
|
8,667,435
|
|
NOTE
5 –
Inventories
Inventories
consisted of the following:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
DirecTV
– serialized
|
|
$
|
1,028,154
|
|
$
|
-
|
|
DirecTV
– nonserialized
|
|
|
667,435
|
|
|
-
|
|
Other
|
|
|
432,804
|
|
|
132,992
|
|
Total
|
|
$
|
2,128,393
|
|
$
|
132,992
|
|
The
Company’s inventories are segregated into three major categories. Serialized
DirecTV inventories consists primarily of satellite receivers and similar
devices. Non-serialized DirecTV inventories consist primarily of satellite
dishes, poles and similar devices which are supplied by DirecTV. Other inventory
consists primarily of cable, switches and various small parts used in the
installation of DirecTV satellite dishes.
NOTE
6 –
Securities Available for Sale
As
of
December 31, 2007, Multiband had the voting rights for and was holding in trust
58,161 common shares of URON for various contingent rights holders whose rights
were tied to potential future warrant exercises or preferred stock conversions.
As of February 4, 2008, certain aforementioned contingent rights were not
exercised by the various holders; therefore Multiband now owns 37,994 shares
of
URON. As a result, Multiband recorded the fair value of URON shares based on
quoted market prices as an unrealized gain.
|
|
Unrealized
Gains on
Securities
|
|
Balance,
December 31, 2007
|
|
$
|
-
|
|
Initial
investment
|
|
|
121,582
|
|
Increase
in value, for the nine months ended
|
|
|
30,396
|
|
Balance,
September 30, 2008
|
|
$
|
151,978
|
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
NOTE
7 –
Stock Transactions
Stock
warrants activity is as follows for the nine months ended September 30,
2008:
|
|
Number of
Warrants
|
|
Weighted – Average
Exercise Price
|
|
Outstanding,
December 31, 2007
|
|
|
3,088,873
|
|
$
|
7.64
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(1,605,310
|
)
|
|
(7.90
|
)
|
Outstanding,
September 30, 2008
|
|
|
1,483,563
|
|
$
|
7.26
|
|
In
February 2008, all remaining shares of Class I Preferred Stock (39,500 shares)
were converted into 526,667 shares of Multiband common stock. This conversion
event created a non-cash dividend expense of $3,744,600 which is reflected
in
the Company’s consolidated statement of operations for the nine months ended
September 30, 2008.
NOTE
8 –
Accrued Liabilities
Accrued
liabilities consisted of the following:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Payroll
and related taxes
|
|
$
|
1,571,249
|
|
$
|
512,960
|
|
Accrued
preferred stock dividends
|
|
|
623,750
|
|
|
642,395
|
|
Accrued
liability - vendor chargebacks
|
|
|
-
|
|
|
630,800
|
|
Accrued
income taxes
|
|
|
145,647
|
|
|
-
|
|
Accrued
interest payable – short term
|
|
|
31,724
|
|
|
27,363
|
|
Other
|
|
|
806,834
|
|
|
718,093
|
|
Total
accrued liabilities – short term
|
|
|
3,179,204
|
|
|
2,531,611
|
|
Accrued
interest payable – long term
|
|
|
74,243
|
|
|
-
|
|
Total
Accrued Liabilities
|
|
$
|
3,253,447
|
|
$
|
2,531,611
|
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
NOTE
9 - Business Segments
The
Company has four reporting segments. Multiband Corp. includes corporate expenses
(e.g. corporate administrative costs), interest income, interest expense,
depreciation and amortization. The MDU segment represents results as the master
service operator for DirecTV. The MCS segment provides voice, data and video
services to residential multi-dwelling units as the principal to subscribers.
The HSP segment provides the installation and service of DirecTV (DTV) video
programming for residents of single family homes. Segment
disclosures by entity are provided to the extent practicable under the Company's
accounting system.
Segment
disclosures are as follows:
|
|
Multiband
Corp.
|
|
MDU
|
|
MCS
|
|
HSP
|
|
Total
|
|
Three
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
4,148,786
|
|
$
|
799,445
|
|
$
|
7,392,428
|
|
$
|
12,340,659
|
|
Income
(loss) from operations
|
|
|
(546,911
|
)
|
|
838,401
|
|
|
(674,349
|
)
|
|
563,714
|
|
|
180,855
|
|
Identifiable
assets
|
|
|
4,675,491
|
|
|
4,261,614
|
|
|
2,328,163
|
|
|
12,876,928
|
|
|
24,142,196
|
|
Depreciation
and amortization
|
|
|
276,907
|
|
|
396,650
|
|
|
163,782
|
|
|
8,978
|
|
|
846,317
|
|
Capital
expenditures
|
|
|
21,497
|
|
|
-
|
|
|
14,205
|
|
|
10,575
|
|
|
46,277
|
|
|
|
Multiband
Corp.
|
|
MDU
|
|
MCS
|
|
HSP
|
|
Total
|
|
Three
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
2,569,486
|
|
$
|
1,084,114
|
|
$
|
-
|
|
$
|
3,653,600
|
|
Income
(loss) from operations
|
|
|
(1,038,768
|
)
|
|
461,068
|
|
|
(1,245,064
|
)
|
|
-
|
|
|
(1,822,764
|
)
|
Identifiable
assets
|
|
|
1,897,511
|
|
|
5,392,234
|
|
|
2,885,771
|
|
|
-
|
|
|
10,175,516
|
|
Depreciation
and amortization
|
|
|
39,846
|
|
|
397,850
|
|
|
332,519
|
|
|
-
|
|
|
770,215
|
|
Capital
expenditures
|
|
|
1,987
|
|
|
-
|
|
|
28,720
|
|
|
-
|
|
|
30,707
|
|
|
|
Multiband
Corp.
|
|
MDU
|
|
MCS
|
|
HSP
|
|
Total
|
|
Nine
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
10,395,193
|
|
$
|
2,488,473
|
|
$
|
15,976,929
|
|
$
|
28,860,595
|
|
Income
(loss) from operations
|
|
|
(2,290,096
|
)
|
|
2,701,269
|
|
|
(1,875,140
|
)
|
|
1,852,737
|
|
|
388,770
|
|
Identifiable
assets
|
|
|
4,675,491
|
|
|
4,261,614
|
|
|
2,328,163
|
|
|
12,876,928
|
|
|
24,142,196
|
|
Depreciation
and amortization
|
|
|
693,165
|
|
|
1,189,380
|
|
|
560,514
|
|
|
20,020
|
|
|
2,463,079
|
|
Capital
expenditures
|
|
|
43,162
|
|
|
-
|
|
|
58,516
|
|
|
10,575
|
|
|
112,253
|
|
|
|
Multiband
Corp.
|
|
MDU
|
|
MCS
|
|
HSP
|
|
Total
|
|
Nine
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
7,619,689
|
|
$
|
4,340,592
|
|
$
|
-
|
|
$
|
11,960,281
|
|
Income
(loss) from operations
|
|
|
(3,220,516
|
)
|
|
2,508,408
|
|
|
(3,595,707
|
)
|
|
-
|
|
|
(4,307,815
|
)
|
Identifiable
assets
|
|
|
1,897,511
|
|
|
5,392,234
|
|
|
2,885,771
|
|
|
-
|
|
|
10,175,516
|
|
Depreciation
and amortization
|
|
|
139,573
|
|
|
1,208,592
|
|
|
1,466,816
|
|
|
-
|
|
|
2,814,981
|
|
Capital
expenditures
|
|
|
1,987
|
|
|
-
|
|
|
269,601
|
|
|
-
|
|
|
271,588
|
|
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
NOTE
10 –
Commitments and Contingencies
Legal
proceedings
The
Company is subject to legal actions that arise in the ordinary course of its
business. The Company accrues for such litigation when a loss is considered
probable and the amount of such loss, or a range of loss, can be reasonably
estimated.
In
July
2008, the Company received a complaint dated May 2008 filed by various
individuals against MMT and DTHC alleging violations of state and federal
statutory payroll overtime law. The Company believes it pays overtime properly
when earned and intends to vigorously defend the allegations. At this time,
the
Company could not reliably estimate a range of loss, if any, with regards to
the
matter.
Significant
relationship
The
Company is a master agent for DirecTV pursuant to a system operator agreement
with DirecTV dated August 2005. Under that agreement the Company is required
to
ensure that its system operators meet minimum technical DTV system standards
so
that the system operator subscribers may properly receive DTV programming
services. The initial term of the agreement is for three years and provides
for
two additional two-year renewals if the Company has a minimum number of paying
video subscribers in its system operator network. The Company has met the
requirements and has entered into the first two year automatic renewal period.
The Company, via MMT, also has a separate home service provider agreement with
DirecTV ending April 30, 2011.
The term
of the MMT contract with DirecTV will automatically renew as of May 1, 2011
for
additional one year periods unless either MMT or DirecTV gives written notice
of
termination at least 90 days in advance of expiration of the then current term.
Termination of the Company's DirecTV agreements would have a material adverse
impact on the Company's on-going operations. Revenues generated from DirecTV
were 93.5% and 91.4% of total revenue for the three and nine months ended
September 30, 2008, respectively. Revenues generated from DirecTV for the three
and nine months ended September 30, 2007 were 70.3% and 63.7% of total revenue,
respectively.
Gain
on extinguishment of debt
In
January 2008, the Company negotiated payment of the remaining balance of the
note payable to Vern Swedin by issuing 7,500 shares of common stock at $2.60
per
share in settlement of this debt resulting in a gain on extinguishment of debt
of $29,965. This modification was accounted for as a gain on extinguishment
of
debt in accordance with EITF 96-19, “Debtor’s Accounting for a Modification or
Exchange of Debt Instruments”. This amount is included in other income on the
consolidated statement of operations for the nine months ended September 30,
2008.
Current
portion of long-term debt
As
of
September 30, 2008, the Company failed to meet one of the compliance covenants
of its lender, Convergent Capital, with respect to having minimum net worth
of
five million dollars at September 30, 2008. Convergent Capital provided the
Company with a waiver for the covenant for the nine months ended September
30,
2008. The Company’s management believes it is probable that the violation will
not be cured at measurement dates that are within the next twelve months. In
accordance with EITF 86-30 “Classification of obligations when a violation is
waived by the creditor”, the Company has classified the debt as current as of
September 30, 2008 and December 31, 2007.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
DirecTECH
Holding Company Bank Loan
In
May
2007 (as subsequently amended in June 2007, December 2007 and June 2008),
DirecTECH Holding Company (DTHC) and its subsidiaries, including Michigan
Microtech, Inc. (MMT) which, prior to March 1, 2008, was 100% owned by DTHC,
entered into a loan and security agreement with MB Financial Bank, N.A. (MB
Bank). Multiband Corporation, effective March 1, 2008, owns 51% of the common
stock of MMT. At the time of Multiband’s purchase of the MMT stock in February
2008, Multiband received a release of the MB Bank’s lien against the MMT stock.
However, MMT remains an obligor on the overall MB Bank loan. To date, MMT has
not utilized any of the loan proceeds. Based on the Company’s interpretation of
Securities Exchange Commission’s Staff Accounting Bulletin No. 5J (SAB 5J), none
of the DTHC bank loan debt is reflected in MMT’s financial statements which have
been consolidated with Multiband Corporation’s financial statements for the
seven months ended September 30, 2008.
On
May 2,
2008, MB Bank filed a complaint against DTHC and various affiliates in the
United States District Court for the Northern District of Illinois, Eastern
Division seeking, amongst other things, to recover the amounts due under the
notes. At the time of the filing of the complaint, balances due under all
facilities totaled $15,340,000, which included a balance due on a revolving
loan
of $3,500,000. On June 18, 2008, MB Bank and DTHC and various affiliates
including MMT, entered into an initial Forbearance Agreement, which expired
on
October 10, 2008, which sets forth revised terms and conditions, including
the
dismissal of the court action without prejudice. The initial Forbearance
Agreement was extended until January 9, 2009. Under this Forbearance Agreement,
MMT remains an obligor on the overall MB Bank loan. Revised terms include
monthly principal payments of $236,667 beginning July 15, 2008. Effective
November 15, 2008, the monthly principal payments increase to $240,914. In
addition, commencing April 21, 2008, interest on all loans will be calculated
using the default rate in the loan agreements (ranges from 9.37-9.62% as of
June
18, 2008) and will be payable on a monthly basis beginning on July 15, 2008.
The
agreement also contains certain reporting requirements and financial covenants
that DTHC must adhere to during the period of the agreement. As of September
30,
2008, the total loan balance equals $11,909,564.
Auto
leases
The
Company leases substantially all of its fleet vehicles under operating leases
from one lessor. Each lease commences upon the in-service date of the vehicle
and requires scheduled lease payments to be paid monthly for one year. After
one
year, the Company has the option to renew the open ended lease for one year
renewal periods or surrender the leased vehicle to the lessor to be sold. If
the
net proceeds of such sale exceed the vehicle’s then depreciated value, the
lessee receives the benefit of such excess. If there is a deficiency upon such
sale, then lessee is required to pay the deficiency as additional rent to
lessor. The Company has entered this agreement jointly and severally with
various subsidiaries of DTHC. For the three and seven months ended September
30,
2008, the Company’s operating lease expense under the lease totaled
approximately $381,000 and $748,000, respectively.
Guaranty
On
March
1, 2006, Corporate Technologies, LLC (CTLLC), a subsidiary of North Central
Equity, LLC, the purchaser of the MBS business segment, signed a lease with
Lexstar Tower I Limited Partnership whereby CTLLC assumed the lease obligation
for substantially all of the first floor space the Company is renting in Fargo,
North Dakota for the period beginning March 1, 2006 to February 28, 2011.
Pursuant to the aforementioned lease, the Company entered into a guaranty
whereby the Company, in the event of a default or early termination of the
lease
by CTLLC, is obligated to perform CTLLC’s lease obligation during months 43-60
of the lease. This guaranty has no effect on the Company’s consolidated
financial statements for the three and nine months ended September 30, 2008
and
2007. However, should Multiband eventually have to perform on the guaranty
in
the future, it could be liable for up to $348,881 in rent payments plus any
associated charges such as property taxes and common area maintenance. The
Company has evaluated the accounting guidance of FIN 45 “Guarantor’s Accounting
and Disclosure Requirements for Guarantees” and has determined that it does not
apply to this guaranty.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
At
September 30, 2008, the Company’s federal and state net operating loss
carryforwards were estimated to be approximately $45,000,000 and $39,000,000,
respectively. Under
Internal Revenue Code Section 382, utilization of federal losses expiring prior
to 2019 is limited to approximately $375,000 each year.
Due
to
Multiband’s purchase of 51% of MMT’s stock, effective March 1, 2008, MMT will no
longer file consolidated tax returns with its former parent DTHC but will file
as a single entity as it no longer meets the 80% ownership required for tax
consolidation. Therefore, MMT will not be able to utilize the tax loss
carryforwards of Multiband Corporation. As of and for the three and nine months
ended September 30, 2008, MMT has recorded income tax expense of $286,658 and
$749,458, respectively.
The
Company has adopted FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty
in Income Taxes” to address the non-comparability in reporting tax assets and
liabilities resulting from a lack of specific guidance in FASB Statement of
Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes”
on the uncertainty in income taxes recognized in an enterprise’s financial
statements. Specifically, FIN 48 prescribes (a) a consistent recognition
threshold and (b) a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return, and provides related guidance on derecognition, classification,
interest and penalties, accounting interim periods, disclosure and transition.
To the extent interest and penalties would be assessed by taxing authorities
on
any underpayment of income taxes, such amounts would be accrued and classified
as a component of income tax expenses on the consolidated statement of
operations. There was no impact on the consolidated financial statements for
the
three and nine months ended September 30, 2008 and 2007 related to FIN 48.
The
Company’s federal and state tax returns are potentially open to examinations for
fiscal years 2005-2007. The Company has no significant unrecognized tax benefits
as of September 30, 2008 that would reasonably be expected to affect our
effective tax rate during the next twelve months.
NOTE
12 –
Related Party Transactions
Proceeds
for the acquisition of US Install Inc. by the Company completed in February,
2008 were obtained via an unsecured promissory note in the amount of $100,000
between Multiband and Bas Mattingly Master, LLC, a trust controlled by J. Bas
Mattingly, chairman of DTHC, which is a 49% owner of MMT. The note carries
an
interest rate of 7% per annum and is due August 20, 2009.
MMT
leases warehouse space from two individuals that have ownership via related
trusts in DTHC. DTHC owns 49% of MMT as a minority interest shareholder (see
Note 4). Lease payments amount to $3,200 per month plus expenses, expiring
in
April 2009.
Multiband
and its subsidiaries lease principal offices located at 2000 44th
Street
SW, Fargo, ND 58013. The Fargo base rate ranges from $7,621 to $8,466 per month.
The Fargo property is owned in part by David Ekman, Chief Information Officer,
Multiband.
Bernard
Schafer is a director of both DTHC and Multiband. DTHC is the minority
shareholder of MMT (see Note 4).
Multiband
and DTHC perform certain management and information systems functions for one
another pursuant to management consulting and employee leasing agreements.
DTHC
is the minority shareholder of MMT (see Note 4). During the three and nine
months ended September 30, 2008, the Company has reduced selling, general and
administrative expenses by $330,000 and $960,000 as a reimbursement of direct
expenses in relation to this management consulting agreement.
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
Multiband
earned a performance bonus as part of the aforementioned management consulting
agreement with DTHC of $1,446,938 which was paid via reduction of the debt
incurred in the acquisition of MMT (see Note 4). The Company recorded this
consulting income as part of other income and expense on the statement of
operations because the income does not constitute the entity’s ongoing major or
central operations. The consulting income was not a reimbursement of direct
expenses.
Jim
Mandel, CEO of Multiband, borrowed DTHC $100,000 in a short-term note paying
simple interest monthly at 10%. This note is subordinated to MB Bank
debt.
Note
13 - Subsequent Event
On
November 3, 2008, the Company and DTHC, entered into a comprehensive Stock
Purchase Agreement (“SPA”) which superseded the parties’ original Plan of Merger
Agreement dated October 2007. Pursuant to the SPA, the Company will purchase
80%
of the issued and outstanding shares of common stock of all DTHC operating
subsidiaries for $40 million and certain other consideration, of which
$6,100,000 has already been paid due to the Company’s prior purchase effective
March 1, 2008 of 51% of the issued and outstanding common stock of Michigan
Microtech, Inc., a Michigan corporation (“MMT”), a former 100% owned DTHC
subsidiary (see Note 4). The remaining $33,900,000 will be paid as follows:
$1,000,000 in cash at closing and a secured promissory note for $32,900,000
which is due four years from the date of the parties’ initial closing of the
SPA. The promissory note carries an interest rate of 8.25% per annum, subject
to
adjustment in the event of a default. Multiband shall have until December 31,
2009, to purchase the remaining 20% of the issued and outstanding shares of
common stock of all DTHC operating subsidiaries. The consideration for the
20%
purchase will be $10 million worth of Multiband Series J Preferred Stock, whose
issuance will require Multiband shareholder approval. The closing on the 80%
stock transaction is expected to occur on or about January 1, 2009, and the
closing on the 20% stock transaction is anticipated to occur on or before
December 31, 2009. The Company will apply FASB 141R and evaluate the purchase
price allocation based on the guidance and fair value of the assets acquired
and
liabilities assumed. The Company has retained an independent outside expert
to
complete a fairness opinion for the Company’s shareholders concerning the
consideration expected to be paid by Multiband in the transaction.
FORWARD-LOOKING
STATEMENTS
From
time
to time, the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, product
pricing, management for growth, integration of acquisitions, technological
developments, new products, and similar matters. Words such as “anticipates”,
“may”, “will”, “should”, “believes”, “estimates”, “expects”, “intends”, “plans”,
“predicts”, “will likely result”, “will continue”, or similar expressions
identify forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements including
those made in this statement. In order to comply with the terms of the Private
Securities Litigation Reform Act, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or Company's forward-looking statements.
The
risks
and uncertainties that may affect the operations, performance, developments
and
results of the Company's business include the following: national and regional
economic conditions; pending and future legislation affecting IT and
telecommunications industries; market acceptance of the Company's products
and
services; the Company's products and services; the Company's continued ability
to provide integrated communication solutions for customers in a dynamic
industry; the Company’s ability to successfully integrate and operate recently
acquired operations, and other competitive factors.
Because
these and other factors could affect the Company's operating results, past
financial performance should not necessarily be considered as a reliable
indicator of future performance and anticipated future period results.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATION
OUR
COMPANY
Multiband
Corporation (the Company), is a Minnesota corporation formed in
September 1975. The Company has three operating segments: 1) Multiband
Consumer Services (MCS, legally known as Multiband Subscriber Services, Inc.),
which encompasses the subsidiary corporations, Multiband USA, Inc., and Rainbow
Satellite Group, LLC, 2) Multi-Dwelling Unit (MDU, legally known as Minnesota
Digital Universe, Inc.); and 3) Home Service Provider (HSP, legally known as
Michigan Microtech, Inc (MMT)).
The
Company completed an initial public offering in June 1984. In
November 1992, the Company became a non-reporting company under the
Securities Exchange Act of 1934. In July 2000, the Company regained its
reporting company status. In December 2000, The Company stock began trading
on
the NASDAQ stock exchange under the symbol VICM. In July 2004, the symbol was
changed to MBND concurrent with the Company’s name change from Vicom,
Incorporated to Multiband Corporation.
The
Company’s website is located at: www.multibandusa.com.
From
its
inception until December 31, 1998, the Company operated as a telephone
interconnect company only. Effective December 31, 1998, the Company
acquired the assets of the Midwest region of Enstar Networking Corporation
(ENC), a data cabling and networking company. In late 1999, in the context
of a
forward triangular merger, the Company, to expand its range of computer products
and related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies USA, Inc. (MBS). MBS provided voice,
data and video systems and services to business and government. The MBS business
segment was sold effective April 1, 2005. The Company’s MCS segment began in
February 2000. MCS, the Company’s continuing operating division, provides voice,
data and video services to multiple dwelling units (MDU), including apartment
buildings, condominiums and time share resorts. During 2004, the Company
purchased video subscribers in a number of separate transactions, the largest
one being Rainbow Satellite Group, LLC. During 2004, the Company also purchased
the stock of Minnesota Digital Universe, Inc., (MDU segment) which made the
Company the largest master service operator in MDU’s for DirecTV satellite
television in the United States. Effective March 1, 2008, the Company purchased
51% of the outstanding stock of MMT. MMT installs DTV video services in single
family homes.
At
October 25, 2008, the Company had approximately 109,000 owned and managed
subscriptions with an additional 24,000 subscriptions supported by the call
center.
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES
|
|
DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES
|
|
|
|
THREE MONTHS ENDED
|
|
NINE MONTHS ENDED
|
|
|
|
September 30,
2008
(unaudited)
|
|
September 30,
2007
(unaudited)
|
|
September 30,
2008
(unaudited)
|
|
September 30,
2007
(unaudited)
|
|
REVENUES
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF PRODUCTS & SERVICES (Exclusive of depreciation and amortization
shown below)
|
|
|
69.3
|
%
|
|
64.2
|
%
|
|
65.0
|
%
|
|
53.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL & ADMINISTRATIVE
|
|
|
22.3
|
%
|
|
64.6
|
%
|
|
24.9
|
%
|
|
59.0
|
%
|
DEPRECIATION
& AMORTIZATION
|
|
|
6.9
|
%
|
|
21.1
|
%
|
|
8.5
|
%
|
|
23.5
|
%
|
IMPAIRMENT
OF ASSETS
|
|
|
-
|
|
|
-
|
|
|
0.2
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
1.5
|
%
|
|
-49.9
|
%
|
|
1.4
|
%
|
|
-36.0
|
%
|
INTEREST
EXPENSE & OTHER, NET
|
|
|
9.3
|
%
|
|
-2.6
|
%
|
|
3.5
|
%
|
|
-2.1
|
%
|
INCOME
(LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST IN
SUBSIDIARY
|
|
|
10.8
|
%
|
|
-52.5
|
%
|
|
4.9
|
%
|
|
-38.1
|
%
|
PROVISION
FOR INCOME TAXES
|
|
|
2.3
|
%
|
|
-
|
|
|
2.6
|
%
|
|
-
|
|
MINORITY
INTEREST IN NET INCOME OF SUBSIDIARY
|
|
|
1.1
|
%
|
|
-
|
|
|
1.9
|
%
|
|
-
|
|
NET
INCOME (LOSS)
|
|
|
7.4
|
%
|
|
-52.5
|
%
|
|
0.4
|
%
|
|
-38.1
|
%
|
RESULTS
OF OPERATIONS
Revenues
Total
revenues increased 237.8% to $12,340,659 for the quarter ended September 30,
2008 as compared to $3,653,600 for the quarter ended September 30, 2007.
Revenues for the nine month period ended September 30, 2008 increased 141.3%
to
$28,860,595 from $11,960,281 for the same period in 2007. This overall increase
in revenues is primarily due to the purchase of MMT in March 2008, with revenues
for the three and seven month periods ended September 30, 2008 of $7,392,428
and
$15,976,929, respectively, offset by sales of approximately 13,000 owned
subscriptions which occurred throughout the first nine months of 2007 in efforts
to strategically sell unprofitable owned assets, utilizing the proceeds from
those assets into facilitating growth in the Company’s managed subscriber
services including our support center and our master system operator
program.
Revenues
in the third quarter of 2008, for the MCS segment, decreased 26.3% to $799,445
as compared to $1,084,114 in the third quarter of 2007. Revenues for the nine
month period ended September 30, 2008, for the MCS segment, decreased 42.7%
to
$2,488,473 from $4,340,592 for the same period in 2007. These decreases were
primarily due to the aforementioned sales of owned subscriptions offset by
an
increase in call center revenue. In 2008, the Company expects MCS revenues
to
remain relatively consistent throughout the balance of the year.
Revenues
in the third quarter of 2008 for the MDU segment increased 61.5% to $4,148,786
as compared to $2,569,486 in the third quarter of 2007. Revenues for the nine
month period ended September 30, 2008, for the MDU segment, increased 36.4%
to
$10,395,193 from $7,619,689 for the same period in 2007. These increases are
primarily due to the revenue recognized for coordinating improvements of systems
used to deliver enhanced programming services, and increased activity from
a
large system operator. The Company believes it can ultimately increase revenues
by selling its support center services to its network of system operators and
by
providing ancillary programs for voice and data services to that same network.
Due to demand for high definition television services and the aforementioned
revenue generated from coordinating system improvements to provide enhanced
programming services, MDU revenues are expected to remain above 2007 levels
for
the balance of 2008.
Revenues
for the three month period ended September 30, 2008 for the HSP segment, was
$7,392,428 in comparison to $0 for the same period in 2007. Revenues for the
seven month period ended September 30, 2008, for the HSP segment (acquired
March
1, 2008), were $15,976,929 from $0 for the same period in 2007. This increase
is
due to the purchase of MMT (see Note 4). The Company expects that revenues
in
the HSP segment will continue at a rate consistent with the three months ended
September 30, 2008 throughout the balance of 2008.
Cost
of Products and Services (Exclusive of depreciation and
amortization)
The
Company's cost of products and services, increased by 264.7% to $8,556,168
for
the quarter ended September 30, 2008, as compared to $2,345,895 for the similar
quarter last year. For the nine months ended September 30, 2008, cost of
products and services were $18,769,937 compared to $6,395,179 in the prior
year,
a 193.5% increase. Overall cost of products and services as a percentage of
revenue did increase due, in part, to the purchase of MMT with costs for the
three and seven month periods ended September 30, 2008 of $5,252,332 and
$10,989,473, respectively. Other factors affecting costs included specific
vendor price increases without a corresponding increase in price to customers,
certain commission payments, and allocation of certain support center costs
to
cost of products and services. These increases were offset by a decrease in
costs related to a decrease in programming and circuit charges due to a
decreased subscriber number.
Cost
of
products and services for the MCS segment for the quarter were $571,202 compared
to $772,985 in the same quarter last year, a 26.1% decrease. For the nine months
ended September 30, 2008, cost of products and services were $1,767,081 for
the
MCS segment, compared to $2,865,173 in the prior year, a 38.3% decrease. In
2008, the decrease in cost of products and services in the MCS segment is
directly related to a decrease in programming and circuit charges between the
comparable periods due to sales of approximately 13,000 owned subscriptions
which occurred throughout the first nine months of 2007.
Cost
of
products and services for the MDU segment for the quarter were $2,732,634
compared to $1,572,910 in the same quarter last year, an 73.7% increase. For
the
nine months ended September 30, 2008, cost of products and services were
$6,013,383 for the MDU segment, compared to $3,530,006 in the prior year, a
70.4% increase. The increase in cost of products and services in the MDU segment
is primarily related to an increase in revenue generated by the system operators
along with a change in revenue mix and certain commission payments. In 2008,
the
Company expects MDU cost of products and services to increase slightly
throughout the balance of the year due to certain commission
payments.
Cost
of
products and services for the HSP segment for the quarter were $5,252,332
compared to $0 in the same quarter last year. For the seven months ended
September 30, 2008, cost of products and services were $10,989,473 for the
HSP
segment (acquired March 1, 2008), compared to the $0 in the prior year. This
increase is due to the purchase of MMT (see Note 4). In 2008, the Company
expects HSP cost of products and services to remain consistent throughout the
remainder of 2008.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased 16.8% to $2,757,319 in the quarter
ended September 30, 2008, compared to $2,360,254 in the prior year’s quarter due
primarily to the addition of the HSP segment resulting from the acquisition
of
MMT in 2008. Selling, general and administrative expenses were, as a percentage
of revenues, 22.3% for the quarter ended September 30, 2008 and 64.6% for the
similar period a year ago. This percentage decrease is primarily due to
decreases in payroll and employee expenses, property maintenance expenses,
and
outside service expenses between the comparable periods due to the sale of
subscribers. The Company revised an accounting estimate for option expense
during the quarter. Multiband Corp segment selling, general and administrative
expense for the quarter was reduced by approximately $209,000 for this revised
estimate. Multiband Corp segment also recorded $330,000 of reimbursed payroll
expenses for management consulting to DTHC per its management consulting
agreement (see Note 12). The Company anticipates that for the remainder of
2008,
selling, general and administrative expenses will remain consistent with third
quarter levels.
For
the
nine months ended September 30, 2008, selling, general and administrative
expenses increased 1.6% to $7,173,357 compared to $7,057,936 for the nine months
ended September 30, 2007. This increase is due to the additional seven months
of
the newly acquired HSP segment offset by a reduction in payroll and employee
expenses, property maintenance expenses, and outside service expenses. As a
percentage of revenue, selling general and administrative expenses were 24.9%
for the nine months ended September 30, 2008, compared to 59.0% for the same
period in 2007. This percentage decrease is primarily due to the decreases
in
payroll, employee expenses, property maintenance expenses and outside service
expenses between the comparable periods for subscribers sold in the MCS segment.
For the nine months ended September 30, 2008, the Multiband Corp. segment has
recorded $960,000 of reimbursed payroll expenses for management consulting
to
DTHC per its management consulting agreement entered into with DTHC in November
2007. (see Note 12).
Depreciation
and Amortization
Depreciation
and amortization expense increased 9.9% to $846,317 for the quarter ended
September 30, 2008 compared to $770,215 in the prior year’s quarter, largely due
to amortization of intangibles related to the MMT purchase (see Note 4), partly
offset by the sale of tangible and intangible assets in various states most
of
which occurred in 2007 (see Note 3). For the nine months ended September 30,
2008, depreciation and amortization expense decreased 12.5% to $2,463,079
compared to $2,814,981 for the nine months ended September 30, 2007. This
decrease in depreciation and amortization through nine months is due to the
sale
of tangible and intangible assets in various states most of which occurred
in
2007 (see Note 3) offset by the increase in amortization of intangible related
to the MMT purchase (see Note 4). Depreciation and amortization expense is
expected to remain comparable to third quarter through the remainder
2008.
Income
(Loss) from Operations
The
Company, in the third quarter of 2008, earned income from operations of $180,855
versus a loss of $1,822,764 during the prior year’s comparable period. Income
from operations was $388,770 during the first nine months of 2008, compared
to a
loss of $4,307,815 during the first nine months of 2007. The MDU segment showed
a profit from operations of $838,401 and $2,701,269 for the three and nine
months ended September 30, 2008 compared to profits of $461,068 and $2,508,408
for the three and nine months ended September 30, 2007. For the third quarter
of
2008, the MCS segment showed a loss from operations of $674,349 compared to
a
loss of $1,245,064 for the same quarter last year. For the nine months ended
September 30, 2008, the MCS segment showed a loss from operations of $1,875,140
compared to a loss of $3,595,707 for the same period in 2007. The Multiband
Corporation segment, which has no revenues, showed a loss from operations of
$546,911 for the three months ended September 30, 2008 and $2,290,096 for the
nine months ended September 30, 2008 compared to losses of $1,038,768 and
$3,220,516 for the same periods last year. For the third quarter of 2008, the
HSP segment showed a profit from operations of $563,714, compared to $0 in
the
same period last year. For the nine months ended September 30, 2008, profit
was
$1,852,737 for the HSP segment, compared to the $0 in the prior year. The HSP
segment did not exist in 2007 so there are no comparable results to report
(see
Note 4). The Multiband Corporation loss is expected to continue in future
periods as corporate overhead is expected to remain consistent with current
levels. The Company expects the MDU segment profitability in future periods
to
stabilize at current levels as the year to date reduction in profits for this
segment has been impacted by increased payments to dealers. The Company plans
to
continue to mitigate its loss in the MCS segment by increasing the subscribers
managed by the support center. At the same time, the Company will look to add
subscribers in its MDU division since the on-going selling, general and
administrative expenses to service those subscribers is more variable than
fixed.
Interest
Expense
Interest
expense was $300,826 for the quarter ended September 30, 2008, versus $108,847
for the similar period a year ago. Amortization of an original issue discount
was $0 and $13,157 for the three months ended September 30, 2008 and 2007.
Interest expense was $514,485 for the nine months ended September 30, 2008
and
$430,264 for the same period last year, primarily reflecting an increase due
to
interest expense incurred on the debt issued for the purchase of 51% of MMT
(see
Note 4). Amortization of original issue discount was $0 for the nine months
ended September 30, 2008 and $29,746 for the same period last
year.
Management
consulting income
During
the three months ended September 30, 2008, Multiband recorded a performance
bonus as part of the management consulting agreement with DTHC of $1,446,938
which was paid via reduction of the debt incurred in the acquisition of MMT
(see
Note 4 and Note 12). The Company recorded this consulting income as part of
other income and expense on the statement of operations because the income
does
not constitute the entity’s ongoing major or central operations. The consulting
income was not a reimbursement of direct expenses. No income was earned during
the comparable period ended September 30, 2007. This income is part of the
Multiband Corp. business segment.
Minority
Interest
Effective
March 1, 2008, the Company purchased 51% of the stock of MMT. The minority
interest on the statement of operations for the three and seven month periods
ended September 30, 2008 was $137,755 and $549,758, respectively. The minority
interest represents DTHC’s 49% ownership of MMT. MMT currently makes up 100% of
the HSP segment.
Income
taxes
Due
to
the Company’s purchase of 51% of MMT’s stock, effective March 1, 2008, MMT will
no longer file consolidated tax returns with its former parent DTHC but will
file as a single entity as it no longer meets the 80% ownership required for
tax
consolidation. Therefore, MMT will not be able to utilize the tax loss
carryforwards of Multiband Corporation since Multiband owns less than 80% of
MMT. As of and for the three and seven month periods ended September 30, 2008,
MMT has recorded a provision for income tax of $286,658 and $749,458,
respectively. MMT currently makes up 100% of the HSP segment.
Net
Income (Loss)
In
the
third quarter of fiscal 2008, the Company generated net income of $910,663
and
incurred a net loss of $1,918,344 for the third fiscal quarter of 2007. For
the
nine months ended September 30, 2008, the Company generated a net income of
$102,706 and incurred a net loss of $4,560,718 for the nine months ended
September 30, 2007. The net income for the three and nine months ended September
30, 2008 is largely due to the addition of the HSP segment via the acquisition
of MMT, the sale of unprofitable subscribers in the MCS segment, the increase
in
managed subscribers in the MDU segment, and the management consulting income
in
Multiband Corp. segment.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2008 and 2007, the Company generated a
net
income of $102,706 and incurred a net loss of $4,560,718, respectively. Net
cash
from operations during the nine months ended September 30, 2008 was $3,891,100
as compared to the net cash used by operations during the nine months ended
September 30, 2007 of $1,432,412. Principal payments on current long-term debt
over the next 12 months are expected to total $1,644,633. As of September 30,
2008, the Company failed to meet one the compliance covenants of its lender,
Convergent Capital, with respect to having minimum net worth of five million
dollars as of the quarter ended September 30, 2008. Convergent Capital provided
the Company with a waiver for the said covenant as of the quarter ended
September 30, 2008. The Company’s management believes it is probable that the
violation will not be cured at measurement dates that are within the next twelve
months. In accordance with EITF 86-30 “Classification of obligations when a
violation is waived by the creditor”, the Company has classified the debt as
current as of September 30, 2008.
Cash
and
cash equivalents totaled $11,092,373 at September 30, 2008 versus $944,456
at
December 31, 2007. Working capital at September 30, 2008 was $2,375,295 as
compared to a working capital deficit of $5,018,177 at December 31, 2007,
primarily due to the acquisition of MMT. Total debt and capital lease
obligations increased by $594,700 in the nine months ended September 30, 2008
due mainly to the addition of notes payable in order to purchase MMT and US
Install. The Company had a material increase in accounts receivable, accounts
payable and accrued liabilities for the period ended September 30, 2008 verses
the period ended December 31, 2007 due to the acquisition of MMT. Net cash
from
investing activities totaled $6,656,473 for the period ended September 30,
2008,
compared to $2,277,400 for the period ended December 31, 2007, due to the
acquisition of MMT. MMT is an obligor on loans entered into by DTHC and
subsidiaries with MB Financial, N.A. (MB Bank) (see Note 10). In the event
that
DTHC and its various subsidiaries other than MMT could not retire the loan
then
MMT’s cash or other assets may have to be utilized to retire the loan which
would adversely affect MMT’s working capital.
The
Company experienced a material increase in revenues between the quarter ended
September 30, 2008 and the quarter ended September 30, 2007 as a result of
the
additional revenue obtained from the purchase of MMT offset by the reduction
of
revenue resulting from the sale of unprofitable assets. For the balance of
2008,
the Company intends to focus on facilitating growth of its HSP business segment
and its managed subscriber services including its support center and its master
system operator program. The Company believes it can increase revenues by
selling its support center services to its network of system operators and
by
providing ancillary programs for voice and data services to that same network.
The
Company used $112,253 for capital expenditures during the nine months ended
September 30, 2008, as compared to $271,588 in the similar period last year.
Capital expenditures consisted of project build-outs and equipment acquired
for
internal use. This decrease was related to a reduction of company funded video
and internet service build outs to MDU properties made during 2008. Capital
expenditures in 2008 are expected to be below the 2007 levels.
Management
anticipates that the impact of the actions listed below will generate sufficient
cash flows to pay current liabilities, long-term debt and capital and operating
lease obligations and fund the Company's operations for the next twelve
months:
|
1. |
Reduction
of operating expenses by controlling payroll, professional fees and
other
general and administrative
expenses.
|
|
2. |
Sale
of video assets on a strategic basis. The Company, based on recent
transactions, believes there is an active market for its video subscriber
assets. The Company believes it can sell these assets, under certain
circumstances, at prices at or above their current carrying value.
However, there is no guarantee these sales will ultimately be favorable
to
the Company.
|
|
3. |
Solicit
additional equity investment in the Company by either issuing preferred
or
common stock.
|
|
4. |
Continue
to market Multiband services and acquire additional multi-dwelling
unit
customers.
|
|
5. |
Control
capital expenditures by contracting Multiband services and equipment
through a landlord-owned equipment
program.
|
|
6. |
Delivery
of video services to residents of single family homes. Effective
March 1,
2008 the Company purchased 51% of the outstanding stock of Michigan
Microtech, Inc. (MMT), formerly a wholly owned subsidiary of DTHC.
MMT
installs DirecTV video services in single family homes. Historically
MMT
has been profitable. The Company anticipates that by combining MMT
operations with Multiband operations that it will achieve a beneficial
impact to its consolidated cash flows and operating results. However,
there is no guarantee that these combined results will ultimately
be
favorable to the Company.
|
|
7. |
Expansion
of call center support via sales of call center services to both
existing
and future system operators and to buyers of the Company’s video
subscribers.
|
Management
of Multiband believes that the cash on hand, positive operating income, combined
with capital resources and the potential ability to monetize intangible
subscriber assets, will be adequate to meet the anticipated liquidity and
capital resource requirements for the next twelve months.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Impairment
of Long-Lived Assets
The
Company’s long-lived assets include property, equipment and leasehold
improvements. At September 30, 2008, the Company had net property and equipment
of $1,306,054, which represents approximately 5.4% of the Company’s total
assets. The estimated fair value of these assets is dependent on the Company’s
future performance. In assessing for potential impairment for these assets,
the
Company considers future performance. If these forecasts are not met, the
Company may have to record an impairment charge, which may be material. During
the three and nine months ended September 30, 2008 and 2007, the Company did
not
record any impairment losses related to long-lived assets.
Impairment
of Goodwill
At
year
end, we test goodwill for impairment. If indicators of impairment are determined
to exist, we test goodwill for impairment quarterly. Our judgments regarding
the
existence of impairment indicators are based on legal factors, market conditions
and operational performance of our operating segments. Future events could
cause
us to conclude that impairment indicators exist and that goodwill associated
with our operating segments which amounts to $116,757 as of September 30, 2008,
may be impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations. During the three
and nine months ended September 30, 2008 and 2007, the Company did not record
any impairment losses related to goodwill.
Impairment
of Intangible Assets
The
intangible assets consist of rights of entry contracts, contracts with DirecTV
and customer contracts. These intangibles are being amortized over their
estimated useful lives ranging from 12 to 108 months. If significant changes
would occur to the estimated future cash flows associated with these
intangibles, the Company would determine if there is impairment and reduce
the
value of intangibles based on the discounted present value of such cash flows.
At September 30, 2008, the Company had net intangibles of $5,107,154 which
represented approximately 21.2% of the Company’s total assets. During the three
and nine months ended September 30, 2008, the Company recorded an impairment
charge to intangible assets of $0 and $65,452, respectively (see Note 2). The
Company did not record any impairment losses related to intangible assets during
the three and nine months ended September 30, 2007.
Inventories
We
value
our inventories at the lower of the actual cost or the current estimated market
value of the inventories. We regularly review inventory quantities on hand
and
record a provision for excess and obsolete inventories. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities
on
hand characterize our industry.
Share-Based
Payments
The
Company accounts for its stock options in compliance with the Statement of
Financial Accounting Standard No. 123 (revised 2004), Share-Based
Payment (SFAS
123(R)), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including
employee stock options based on fair values. The Company’s determination of fair
value of share-based payment awards on the date of grant using an option-pricing
model is affected by the Company’s stock price as well as assumptions regarding
a number of variables. These variables include, but are not limited to the
Company’s expected stock price volatility, and actual and projected stock option
exercise behaviors and forfeitures. During the quarter ended September 30,
2008,
the Company evaluated the variables used in calculating its option values.
The
Company has recorded a change in accounting estimate based on this
assessment.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Securities Exchange
Commission’s Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”,
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectability is reasonably assured; and (iv)
product delivery has occurred or services have been rendered. The Company
recognizes revenue as products are shipped based on FOB shipping point terms
when title passes to customers.
The
Company earns revenues from four sources: 1) Voice, video and data
communications products which are sold and installed, 2) Multiband user charges
to multiple dwelling units, 3) MDU earns revenue primarily through the
activation of, enhancement of, and residual fees on video programming services
provided to residents of multiple dwelling units; and 4) MMT earns revenue
primarily through the installation and service of DirecTV (DTV) video
programming services for residents of single family homes.
Customers
contract for both the purchase and installation of voice and data networking
technology products and certain video technologies products. Revenue is
recognized when the products are delivered and installed and the customer has
accepted and has the ability to fulfill the terms.
Revenue
generated from activation of video programming services is earned in the month
of activation. According to Multiband's Master System Operator agreement with
DirecTV, in the event that a customer cancels within the first 12 months of
service, DirecTV has the right to chargeback the Company for a portion of the
activation fees received. In accordance with Securities Exchange Commission
SAB
104, the Company has estimated the potential charge back of commissions received
on activation fees during the past 12 months based on historical percentages
of
customer cancellations and has included that amount as a reduction of revenue.
Residual income is earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns a fixed
percentage based on net cash received by DirecTV for recurring monthly services,
a variable amount depending on the number of activations in a given month,
and a
variable amount for coordinating improvements of systems used to deliver
enhanced programming services. The Company’s master system operator contract
with DirecTV also permits the Company to earn revenues through its control
of
other system operators who are unable to provide DirecTV video programming
services without the Company’s performance.
MMT
has a
home services provider (HSP) agreement with DirecTV which allows MMT to install
and activate DTV video programming services for residents of single family
homes. As a DirecTV HSP, MMT earns revenue for installing and servicing DTV
video customers pursuant to predetermined rates set by DirecTV which may vary
from time to time. Revenue is recognized upon completion of the delivery and
installation of equipment.
The
Company reports the aforementioned voice, data, and video revenues on a gross
basis based on the following factors: the Company has the primary obligation
in
the arrangement with its customers; the Company controls the pricing of its
services; the Company performs customer service for the agreements; the Company
approves customers; and the Company assumes the risk of payment for services
provided.
We
offer
some products and services that are provided by third party vendors. We review
the relationship between us, the vendor and the end customer on an individual
basis to assess whether revenue should be reported on a gross or net basis.
As
an example, our resold satellite digital television revenue is reported on
a net
basis.
The
Company has determined that the accounting policies for income recognition
described above were in accordance with the Financial Accounting Standards
Board
Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as
a Principal versus Net as an Agent”. EITF No. 99-19 employs multi-factor tests
to determine whether amounts charged to customers in respect of certain expenses
incurred should be included in revenues or netted against such
expenses.
In
June
2006, the Financial Accounting Standards Board (FASB) ratified the consensus
of
Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF 06-3
concluded that the presentation of taxes imposed on revenue-producing
transactions (sales, use, value added and excise taxes) on either a gross
(included in revenues and costs) or a net (excluded from revenues) basis is
an
accounting policy that should be disclosed. The Company’s policy is to present
taxes imposed on revenue-producing transactions on a net basis.
Revenue
generated by the support center to service third party subscribers by providing
billing and call center support services is recognized in the period the related
services are provided.
Multiband,
Rainbow, MDU and MBUSA user charges are recognized as revenues in the period
the
related services are provided in accordance with SAB 104. Any amounts billed
prior to services being provided are reported as deferred service obligations
and revenues. MMT installation and services revenues are recognized in the
period the related services are provided in accordance with SAB
104.
ITEM
3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
The
Company is not subject to any material interest rate risk as any current lending
agreements are at a fixed rate of interest except for the Convergent Capital
note of $1,450,000, which varies from 11% to 14%, dependent on the Company’s
common stock price. Each 1% change in interest impacts the statement of
operations by approximately $15,000 annually.
ITEM
4. CONTROLS AND PROCEDURES
As
of the
end of the period covered by this quarterly report, the Company carried out
an
evaluation, under the supervision and with the participation of the Company’s
management, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures are effective in alerting them in a timely basis to
material information relating to the Company required to be disclosed in the
Company’s periodic SEC reports. There have been no significant changes in the
Company’s internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
There was no change in the Company’s internal control over financial reporting
during the Company’s most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. An exception to the aforementioned conclusions
is hereby made specifically with regards to the Company’s home service provider
business segment. As of September 30, 2008, the Company has not tested the
effectiveness of any controls or procedures with regards to MMT due to the
recent acquisition of 51% of MMT. The Company does intend to perform such
testing prior to December 31, 2008.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company is subject to legal actions that arise in the ordinary course of its
business. The Company accrues for such litigation when a loss is considered
probable and the amount of such loss, or a range of loss, can be reasonably
estimated.
The
Company, in July 2008, received a complaint dated May 2008 filed by various
individuals against MMT and DTHC alleging violations of state and federal
statutory payroll overtime law. The Company believes it pays overtime properly
when earned and intends to vigorously defend the allegations. At this time,
the
Company could not reliably estimate a range of loss, if any, with regards to
the
matter.
ITEM
1A. RISK FACTORS
Our
operations and our securities are subject to a number of risks, including but
not limited to those described below. If any of the following risks actually
occur, the business, financial condition or operating results of Multiband
and
the trading price or value of our common stock could be materially adversely
affected.
General
Multiband,
since 1998, has taken several significant steps to reinvent and reposition
itself to take advantage of opportunities presented by a shifting economy and
industry environment.
Recognizing
that voice, data and video technologies in the late twentieth century were
beginning to systematically integrate as industry manufacturers were evolving
technological standards from "closed" proprietary networking architectures
to a
more "open" flexible and integrated approach, Multiband, between 1998 and 2001,
purchased three competitors which, in the aggregate, possessed expertise in
data
networking, voice and data cabling and video distribution technologies.
In
early
2000, Multiband created its MCS division, employing the aforementioned
expertise, to provide communications and entertainment services (local dial
tone, long distance, high-speed internet and expanded satellite television
services) to residents in MDUs on one billing platform, which the Company
developed internally.
Net
Income (Losses)
The
Company had net income of $102,706 for the nine months ended September 30,
2008
and net losses of $6,088,353 for the year ended December 31, 2007 and
$10,183,723 for the year ended December 31, 2006. The Company may never be
consistently profitable.
The
prolonged effects of generating losses without additional funding may restrict
our ability to pursue our business strategy. Unless our business plan is
successful, an investment in our common stock may result in a complete loss
of
an investor's capital.
If
we
cannot achieve profitability from operating activities, we may not be able
to
meet:
o |
our
capital expenditure objectives;
|
o |
our
debt service obligations; or
|
o |
our
working capital needs.
|
Goodwill
In
June
2001, the Financial Accounting Standards Board (FASB) adopted Statement of
Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets" which changed the amortization rules on recorded goodwill from a monthly
amortization to an annual test of "impairment" for fiscal years beginning after
December 15, 2001. As of September 30, 2008, the Company had goodwill of
$116,757 primarily related to the purchase of US Installs. At September 30,
2008
the Company did not note any indications of impairment related to
goodwill.
Deregulation
Several
regulatory and judicial proceedings have recently concluded, are underway or
may
soon be commenced that address issues affecting operations and those of our
competitors, which may cause significant changes to our industry. We cannot
predict the outcome of these developments, nor can we assure you that these
changes will not have a material adverse effect on us. Historically, we have
been a reseller of products and services, not a manufacturer or carrier
requiring regulation of its activities. Pursuant to Minnesota statutes, our
Multiband activity is specifically exempt from the need to tariff our services
in MDU's. However, the Telecommunications Act of 1996 provides for significant
deregulation of the telecommunications industry, including the local
telecommunications and long-distance industries. This federal statute and the
related regulations remain subject to judicial review and additional
rule-makings of the Federal Communications Commission, making it difficult
to
predict what effect the legislation will have on us, our operations, and our
competitors.
Dependence
on Strategic Alliances
Several
suppliers or potential suppliers of Multiband, such as McLeod, WorldCom, WS
Net,
XO Communications and others have filed for bankruptcy in recent years. While
the financial distress of its suppliers or potential suppliers could have a
material adverse effect on Multiband's business, Multiband believes that enough
alternate suppliers exist to allow the Company to execute its business plans.
The Company is also highly dependent on its Master System Operator agreement
with DirecTV. The initial term of the agreement expires in August 2008, and
provides for two additional two-year renewals if the Company has a minimum
number of paying video subscribers in its system operator network. The Agreement
automatically renewed for a two year period in August 2008. Although an
alternate provider of satellite television services, Echostar, exists, the
termination of its agreements with DirecTV could have a material adverse effect
on Multiband's business.
Changes
in Technology
A
portion
of our projected future revenue is dependent on public acceptance of broadband
and expanded satellite television services. Acceptance of these services is
partially dependent on the infrastructure of the internet and satellite
television which is beyond Multiband's control. In addition, newer technologies,
such as video-on-demand, are being developed which could have a material adverse
effect on the Company's competitiveness in the marketplace if Multiband is
unable to adopt or deploy such technologies.
Attraction
and Retention of Employees
Multiband's
success depends on the continued employment of certain key personnel, including
executive officers. If Multiband were unable to continue to attract and retain
a
sufficient number of qualified key personnel, its business, operating results
and financial condition could be materially and adversely affected. In addition,
Multiband's success depends on its ability to attract, develop, motivate and
retain highly skilled and educated professionals with a wide variety of
management, marketing, selling and technical capabilities. Competition for
such
personnel is intense and is expected to increase in the future.
Intellectual
Property Rights
Multiband
relies on a combination of trade secret, copyright and trademark laws, license
agreements, and contractual arrangements with certain key employees to protect
its proprietary rights and the proprietary rights of third parties from which
Multiband licenses intellectual property. Multiband also relies on agreements
with owners of MDUs which grant the Company rights of access for a specific
period to MDU premises whereby Multiband is allowed to offer its voice, data,
and video services to individual residents of the MDUs. If it was determined
that Multiband infringed the intellectual property rights of others, it could
be
required to pay substantial damages or stop selling products and services that
contain the infringing intellectual property, which could have a material
adverse effect on Multiband's business, financial condition and results of
operations. Also, there can be no assurance that Multiband would be able to
develop non-infringing technology or that it could obtain a license on
commercially reasonable terms, or at all. Multiband's success depends in part
on
its ability to protect the proprietary and confidential aspects of its
technology and the products and services it sells. There can be no assurance
that the legal protections afforded to Multiband or the steps taken by Multiband
will be adequate to prevent misappropriation of Multiband's intellectual
property.
Variability
of Quarterly Operating Results
Variations
in Multiband's revenues and operating results occur from quarter to quarter
as a
result of a number of factors, including customer engagements commenced and
completed during a quarter, the number of business days in a quarter, employee
hiring and utilization rates, the ability of customers to terminate engagements
without penalty, the size and scope of assignments and general economic
conditions. Because a significant portion of Multiband's expenses are relatively
fixed, a variation in the number of customer projects or the timing of the
initiation or completion of projects could cause significant fluctuations in
operating results from quarter to quarter.
Certain
Anti-Takeover Effects
Multiband
is subject to Minnesota statutes regulating business combinations and
restricting voting rights of certain persons acquiring shares of Multiband.
These anti-takeover statutes may render more difficult or tend to discourage
a
merger, tender offer or proxy contest, the assumption of control by a holder
of
a large block of Multiband's securities, or the removal of incumbent
management.
Volatility
of Multiband's Common Stock
The
trading price of our common stock has been and is likely to be volatile. The
stock market has experienced extreme volatility, and this volatility has often
been unrelated to the operating performance of particular companies. Investors
may not be able to sell the common stock at or above the price they paid for
their common stock, or at all. Prices for the common stock will be determined
in
the marketplace and may be influenced by many factors, including variations
in
our financial results, changes in earnings estimates by industry research
analysts, investors' perceptions of us and general economic, industry and market
conditions.
Future
Sales of Our Common Stock May Lower Our Stock Price
If
our
existing shareholders sell a large number of shares of our common stock, the
market price of the common stock could decline significantly. The perception
in
the public market that our existing shareholders might sell shares of common
stock could depress our market price.
Competition
We
face
competition from others who are competing for a share of the MDU market,
including other satellite companies, cable companies and telephone companies.
Some of these companies have significantly greater assets and resources than
we
do.
Uncertain
Effects Of The Merger
During
the fourth quarter of 2008, the Company entered into a Stock Purchase Agreement
(SPA) with DTHC (see Note 13). Even if the SPA is consummated, the DTHC
operating entity business as merged into the Multiband business may not achieve
the operating results and growth anticipated by management in structuring the
transaction.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
a)
|
An
annual meeting of Multiband shareholders was held on August 27, 2008.
There were present or present by proxy at the meeting 3,648,552 votes,
the
number necessary to hold a quorum.
|
|
b)
|
The
meeting resulted in the following votes related to the following
proxy
items:
|
1. Election
of directors: All directors were re-elected for a term serving until the next
annual meeting with the votes in favor listed below:
Director
|
|
Number of votes
|
|
Bell
|
|
|
3,457,552
|
|
Bennett
|
|
|
3,455,602
|
|
Dodge
|
|
|
3,457,552
|
|
Harris
|
|
|
3,457,552
|
|
Mandel
|
|
|
3,455,602
|
|
Miller
|
|
|
3,457,552
|
|
Schafer
|
|
|
3,457,602
|
|
2. Ratify
the election of Virchow, Krause and Company, LLP as registered public
accountants of the Company for fiscal year 2007.
|
|
Number of votes
|
|
For
|
|
|
3,457,552
|
|
Against
|
|
|
191,000
|
|
Abstain
|
|
|
557
|
|
ITEM
6. EXHIBITS
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of
the
Exchange Act.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of
the
Exchange Act.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MULTIBAND
CORPORATION
Registrant
|
Date:
November 14, 2008
|
By:
|
/s/
James L. Mandel
Chief
Executive Officer
|
Date:
November 14, 2008
|
By:
|
/s/
Steven M. Bell
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
|