|
1.
|
Requires
an entity to recognize a servicing asset or servicing liability
each time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
|
2.
|
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if
practicable.
|
|
3.
|
Permits
an entity to choose “Amortization method” or “Fair value measurement
method” for each class of separately recognized servicing assets and
servicing liabilities.
|
|
4.
|
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities
with
recognized servicing rights, without calling into question the
treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner
as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
|
5.
|
Requires
separate presentation of servicing assets and liabilities subsequently
measured at fair value in the statement of financial position
and
additional disclosures for all separately recognized servicing
assets and
servicing liabilities.
|
Management
believes that this statement will not have a significant impact on the
financial
statements.
In
June
2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes “ FIN
48 clarifies the accounting for uncertainty in income taxes recognized
in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective in fiscal years beginning
after
December 15, 2006. Management believes that this Statement will not have
a
significant impact on the financial statements.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measures.” SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (“GAAP”), expands disclosures about
fair value measurements, and applies under other accounting pronouncements
that
require or permit fair value measurements. SFAS No. 157 does not require
any new
fair value measurements, however the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No.
157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, which for the Company would be its fiscal year beginning
January 1, 2008. The implementation of SFAS No. 157 is not expected to
have a
material impact on the Company’s results of operations and financial
condition.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans – an
amendment of
FASB Statements No. 87, 88, 106 and 132(R).” This statement requires employers
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multi-employer plan) as an asset or liability
in its statement of financial position and to recognize changes in that
funded
status in the year in which the changes occur through comprehensive income
of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial
position
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after December 15, 2006. This pronouncement does not currently
apply
to the Company.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (Topic IN), “Quantifying Misstatements in Current
Year Financial Statements” (“SAB No. 108”). SAB No. 108 addresses how the effect
of prior year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires
SEC
registrants (i) to quantify misstatements using a combined approach which
considers both the balance sheet and income statement approaches; (ii) to
evaluate whether either approach results in quantifying an error that
is
material in light of relevant quantitative and qualitative factors; and
(iii) to adjust their financial statements if the new combined approach
results in a conclusion that an error is material. SAB No. 108 addresses
the
mechanics of correcting misstatements that include effects from prior
years. It
indicates that the current year correction of a material error that included
prior period effects may result in the need to correct prior year financial
statements even if the misstatement in the prior year or years is considered
immaterial. Any prior year financial statements found to be materially
misstated
in years subsequent to the issuance of SAB No. 108 would be restated
in
accordance with SFAS No. 154, “Accounting Changes and Error Corrections.”
Because the combined approach represents a change in practice, the SEC
staff
will not require registrants that followed an acceptable approach in
the past to
restate prior years’ historical financial statements. Rather, these registrants
can report the cumulative effect of adopting the new approach as an adjustment
to the current year’s beginning balance of retained earnings. If the new
approach is adopted in a quarter other than the first quarter, financial
statements for prior interim periods within the year of adoption may
need to be
restated. SAB No. 108 is effective for fiscal years ending after November
15,
2006, which for the Company would be its fiscal year beginning January
1, 2007.
The implementation of SAB No. 108 is not expected to have a material
impact on
the Company’s financial position or results of operations.
Note
4 – Acquisitions
On
December 2, 2005, the Company acquired Diverse Networks, Inc. (“DNI”) pursuant
to the “Merger Agreement”, which provided that each share of DNI common stock
would be converted into the right to receive either (i) $0.21 in the form
of a one-year 8% promissory note, or (ii) one share of Series B Preferred
Stock, at the election of each DNI stockholder. The transaction was accounted
for as a recapitalization effected through a reverse merger, in which DNI
was
treated as the “acquiring” company for financial reporting purposes.
Each
share of Series B Preferred Stock will initially be convertible starting
December 1, 2007, into that number of shares of the Company’s common stock
obtained by multiplying the number of shares to be converted by a fraction,
the
numerator of which is .5942795 and the denominator equal to the “market price”
of the Company’s common stock at the time of conversion. The conversion rate is
subject to adjustment.
The
Company issued approximately $862,000 in promissory notes and one million
shares
of Series B Preferred Stock to DNI stockholders. In addition, the Company
assumed $228,000 of outstanding DNI debt in connection with the
transaction.
The
Company expensed $401,727 of net liabilities assumed upon the recapitalization
and recorded the amount to recapitalization expense on the statement of
operations.
On
May 5,
2006, the Company acquired UTSI International Corporation (“UTSI”) pursuant to
the “Agreement and Plan of Merger,” dated May 5, 2006. Pursuant to the Merger
Agreement, UTSI merged with and into the Company, with the Company as the
surviving corporation. Each share of UTSI common stock outstanding at the
effective time of the merger was converted into the right to receive 1.4380297
shares of Series C Preferred Stock. The 1,529,871 shares of UTSI common
stock
outstanding were converted into an aggregate of 2,200,000 shares of Series
C
Preferred Stock.
Each
share of Series C Preferred Stock will initially be convertible, starting
after
May 5, 2008, into that number of shares of the Company’s common stock obtained
by multiplying the number of shares to be converted by a fraction, the
number of
which is $1.00 and the denominator equal to the “market price” of the Company’s
common stock at the time of conversion subject to adjustment.
The
purchase price was allocated to tangible and intangible assets and liabilities
at the date of acquisition as follows:
Current
assets
|
|
$
|
389,884
|
|
Property
and equipment
|
|
|
23,630
|
|
Customer
list
|
|
|
735,433
|
|
Goodwill
|
|
|
1,868,986
|
|
Total
assets
|
|
$
|
3,017,933
|
|
Less
– Total liabilities
|
|
|
817,933
|
|
|
|
$
|
2,200,000
|
|
The
following unaudited pro forma financial information presents the combined
results of operations of the Company and UTSI as if the acquisition had
occurred
as of the beginning of the period presented. The unaudited pro forma financial
information is not necessarily indicative of what the Company’s consolidated
results of operations actually would have been had the Company completed
the
acquisition at the beginning of each period. In addition, the unaudited
pro
forma financial information does not attempt to project the future results
of
operations of the combined company.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
3,587,107
|
|
$
|
4,288,505
|
|
Cost
of goods sold
|
|
|
1,897,884
|
|
|
2,401,321
|
|
Gross
profit
|
|
$
|
1,689,223
|
|
$
|
1,887,184
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
185,665
|
|
|
-
|
|
Selling,
general and administrative
|
|
|
3,810,324
|
|
$
|
2,169,869
|
|
Recapitalization
expense
|
|
|
-
|
|
|
1,513,727
|
|
Depreciation
and amortization
|
|
|
170,215
|
|
|
185,986
|
|
Total
operating expenses
|
|
$
|
4,166,204
|
|
$
|
3,869,582
|
|
Loss
from operations
|
|
$
|
(2,476,981
|
)
|
$
|
(1,982,398
|
)
|
Other
expense, net
|
|
|
682,236
|
|
|
48,815
|
|
Loss
before income taxes
|
|
$
|
(3,159,217
|
)
|
$
|
(2,031,213
|
)
|
Income
taxes (benefit)
|
|
|
81,139
|
|
|
(200,229
|
)
|
Net
loss from continuing operations
|
|
$
|
(3,240,356
|
)
|
$
|
(1,830,984
|
)
|
Note
5 – Property and equipment
Property
and equipment consists of the following:
|
|
|
|
As of June 30,
|
|
|
|
Life
|
|
2007
|
|
Office
furniture and equipment
|
|
|
3–7
|
|
$
|
1,122,899
|
|
Leasehold
improvements
|
|
|
10
|
|
|
279,410
|
|
|
|
|
|
|
$
|
1,402,309
|
|
Less –
Accumulated depreciation
|
|
|
|
|
|
1,244,771
|
|
|
|
|
|
|
$
|
157,538
|
|
Note
6 – Derivative liability
On
March
31, 2006, the Company entered into a Securities Purchase Agreement with
certain
accredited investors pursuant to which they agreed to issue up to $2,000,000
of
principal amount of convertible promissory notes
in
three separate tranches and warrants to purchase shares of the Company’s common
stock (the “Securities Purchase Agreement”). The tranches of notes are to be
issued and sold as follows: (i) $700,000 upon execution and delivery of the
Securities Purchase Agreement; (ii) $600,000 within five days of filing of
a registration statement with the Securities and Exchange Commission (the
“SEC”)
registering the shares of common stock issuable upon conversion of the
notes and
exercise of the warrants issued pursuant to the Securities Purchase Agreement
(the “Registration Statement”) and (iii) $700,000 within five days of the
Registration Statement being declared effective by the SEC. The convertible
notes have a three year term and bear interest at 6%. The notes are convertible
into the Company’s common stock pursuant to a “variable conversion price” equal
to the “Applicable Percentage” multiplied by the “Market Price.” “Applicable
Percentage” is initially 50%, provided that such percentage will be increased to
55% if the Registration Statement is filed on or before April 30, 2006
and
further increased to 60% if the Registration Statement is declared effective
by
the SEC on or before July 29, 2006. “Market Price” means the average of the
lowest three trading prices (as defined) for the Company’s common stock during
the twenty trading day period prior to conversion. Upon an event of default,
the
notes are immediately due and payable at an amount equal to the greater
of
(i) 140% of the then outstanding principal amount of notes plus interest
and (ii) the “parity value” defined as (a) the highest number of shares of
common stock issuable upon conversion of the notes multiplied by (b) the
highest
closing price for the Company’s common stock during the period beginning on the
date of the occurrence of the event of default and ending one day prior
to the
demand for prepayment due to the event of default. The notes are secured
by a
first lien on all of the Company’s assets, including all intellectual
property.
Subject
to certain terms and conditions, the notes are redeemable by the Company
at a
rate of between 120% to 140% of the outstanding principal amount of the
notes
plus interest. In addition, so long as the average daily price of the Company’s
common stock is below the “initial market price”, the Company may prepay such
monthly portion due on the outstanding notes and the investors agree that
no
conversions will take place during such month where this option is exercised
by
the Company.
The
notes
were issued with warrants to purchase up to 50,000,000 shares of the Company’s
common stock at an exercise price of $0.07 per share, subject to
adjustment.
In
connection with the offer and sale of the notes and warrants, the Company
engaged Envision Capital LLC, as a finder for the transaction. Envision
will
receive a ten percent cash commission on the sale of the notes and warrants
to
purchase up to 5,000,000 shares of the Company’s common stock on the same terms
and conditions as the warrants issued to purchasers under the Securities
Purchase Agreement.
The
Company is accounting for the conversion option in the convertible note
and the
conversion price in the Securities Purchase Agreement and the associated
warrants as derivative liabilities in accordance with SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in
a
Company’s Own Stock” due to the fact that the conversion feature and the
warrants both have a variable conversion price.
The
fair
value of the Convertible Note was determined utilizing the Black-Scholes
stock
option valuation model. The significant assumptions used in the valuation
are:
the exercise price as noted above; the stock price as of June 30, 2007;
expected
volatility of 66%; risk free interest rate of approximately 4.50%; and
a term of
one year.
The
fair
value of the Securities Purchase Agreement was determined utilizing the
Black-Scholes option valuation model. The significant assumptions used
in the
valuation are: the exercise price as noted above; the stock price as of
June 30,
2007; expected volatility of 66%; risk free interest rate of approximately
4.50%; and a term of three years.
The
notes
are due as follows:
March
31, 2009
|
|
$
|
690,630
|
|
May
4, 2009
|
|
|
600,000
|
|
October
11, 2009
|
|
|
700,000
|
|
|
|
$
|
1,990,630
|
|
Note
7 – Notes Payable
The
Company is obligated to individuals and corporations for notes with interest
rates of between 8 and 10%, mostly payable in monthly and quarterly
installments
Note
8- Leases
The
Company leases office space for its various subsidiaries.
The
Company leases certain equipment under capital leases. The capital leases
will
expire during the year ending December 31, 2007. The future minimum lease
payments due in 2007 total $2,781. These leases are secured by the leased
equipment.
Future
minimum payments under capital and operating leases as of December 31,
2006 are
as follows:
2007
|
|
$
|
384,908
|
|
2008
|
|
|
381,461
|
|
2009
|
|
|
381,461
|
|
2010
|
|
|
215,433
|
|
2011
|
|
|
106,095
|
|
|
|
$
|
1,469,358
|
|
Note
9 – Major Customers
During
the six months ending June 30, 2007, the Company had four major customers,
sales
to which represent approximately 55% of the Company’s total
revenues.
Item
2. Management’s Discussion and Analysis or Plan of
Operations
The
following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and related notes included
in this
report. This report contains “forward looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements
contained
in this report that are not historic in nature, particularly those that
utilize
terminology such as “may” or “will,” or comparable terminology, are forward
looking statements based upon current expectations and assumptions. Various
risks and uncertainties could cause actual results to differ materially
from
those expressed in these forward looking statements. This report should
be read
in conjunction with the Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2006 filed on May 10, 2007 and its Quarterly Report
on Form
10-QSB for the quarter ended March 31, 2007 filed on May 17, 2007 with
the
Securities and Exchange Commission (the “SEC”).
Interact
Holdings Group, Inc. (the “Company”, “we” or “us”) was incorporated on May 8,
2001 under the laws of the State of Florida as a development-stage company
under
the name “The Jackson Rivers Company.”
Recent
Developments
On
March
31, 2007, we entered into another Securities Purchase Agreement with the
same
accredited investors who previously invested in the Company on March 31,
2006,
pursuant to which we agreed to issue an additional tranche of $220,000
of
convertible promissory notes. The convertible notes have a three-year term
and
bear interest at a rate of eight percent (8%) per annum, and are convertible
into shares of our common stock under the same terms set forth in Note
6 to the
consolidated financial statements included with this Quarterly Report.
The notes
also include warrants to purchase up to 10,000,000 shares of our common
stock at
an exercise price of $0.07 per share, subject to adjustment.
In
connection with the offer and sale of these notes and the warrants, we
engaged
Envision Capital LLC as a finder for the transaction. Under the terms of
the
engagement, Envision will receive a ten percent (10%) cash commission on
the
sale of the notes, and warrants to purchase up to 5,000,000 shares of our
common
stock on the same terms and conditions as the warrants issued to purchasers
under such Securities Purchase Agreement.
Our
Business
The
Company is in the business of providing operational and technical support
to
companies in the oil & gas pipeline industries, electrical utility and other
industries. We offer a wide range of expertise specific to these
industries including engineering design, inspection and audit services. We
provide customers with hardware and automation systems. We offer and help
integrate business efficiency and real time operations software applications.
Through our state of the art networks operations facility, we can also
provide
our customers with a variety of managed services.
Several
factors can be identified as to why our services are sought after: (i)
escalating energy costs are necessitating higher production standards and
great
resource management; (ii) aging infrastructures have increased maintenance
budgets and initiated new efforts to update equipment and operations; and
(iii)
increases in security and control systems post-9/11 has put greater emphasis
and
more dollars into operations management.
To
meet
these industry needs, we provide high technology tools and services that
help
other companies, government/institutions, and functional organizational
units
manage their industrial infrastructure and economic assets more effectively.
Our customers today include major petroleum companies such as Shell, BP,
Chevron and
others. We consider ourselves to be among the leaders in pipeline
operation tools, leak protection, and regulatory compliance.
We
presently own two operational companies, Diverse Networks, Inc. ("DNI")
and UTSI
International Corporation ("UTSI") both located in Houston , Texas. Taken
together, DNI and UTSI have more than 30 years of experience and have worked
with over forty of the world’s top petroleum companies.
We
are
actively seeking to expand the commercialization of our services to other
key
industries such as telecommunications, water and waste water, and distributed
energy, but cannot guarantee we will be successful in doing so. We also
maintain
operations in Madrid, Spain, which we hope to use to reach out to a growing
international market for our products and services.
Revenues. Net
sales
from operations increased to $1,208,642 in the three months ended June
30, 2007,
from $757,836 during the same period in 2006. This increase was attributable
to
the acquisition of UTSI.
Cost
of Sales.
Cost of
sales for continued operations during the second quarter of 2007 increased
to
$603,975, or approximately 11%, from $533,420 during the second quarter
2006. As
a percentage of net sales, cost of sales during the second quarter 2007
decreased to 50% of net sales, as compared to approximately 70% of sales
for the
comparable period in 2006. The decrease in cost of sales as a percentage
of net
sales resulted primarily from the preliminary undertaking of new business
products through the mergers. As a result, we generated a gross profit
of
$604,667 with a gross profit margin of approximately 50% for the three
months
ended June 30, 2007.
Expenses.
Selling,
general and administrative expenses, and research and development
expenses,
expenses increased to $1,504,853 in the second quarter of 2007, from $943,936
during the same period in 2006. This increase was attributable to the addition
of UTSI, and to research and development expenditures of $107,072 in the
three
months ended June 30, 2007 compared to $-0- during the corresponding period
in
2006.
Operating
loss. We
incurred an operating loss of $1,013,379 for the three months ended June
30,
2007, as compared to an operating loss of $870,074 for the three months
ended
June 30, 2006. This increase in operating losses was due primarily to increased
research and development expenses.
Results
of Operations for the Six Months Ended June 30, 2007
Revenues. Net
sales
from operations increased to $2,261,777 in the six months ended June 30,
2007,
from $1,226,550 during the same period in 2006. This increase was attributable
to the acquisition of UTSI.
Cost
of Sales.
Cost of
sales for continued operations during the six months ended June 30, 2007
increased to $1,209,387 from $746,508 for the six months ended June 30,
2007.
The increase in cost of sales as a percentage of net sales resulted primarily
from the acquisition of UTSI.
Expenses.
Selling,
general and administrative expenses, and research and development
expenses,
in the
six months ended June 30, 2007 increased to $2,359,906,
from $1,801,417 for the corresponding period in 2006. This increase was
primarily attributable to sales and administrative personnel associated
with the
acquisition of UTSI.
Operating
loss.
We
incurred an operating loss of $1,307,516 for the six months ended June
30, 2007,
as compared to an operating loss of $1,321,375 for the six months ended
June 30,
2006. The decrease in operating losses was due to improved operating
efficiencies that were achieved when we acquired UTSI.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable,
and
collectibility is reasonably assured.
Liquidity
and Capital Resources
We
have
financed our operations, acquisitions, debt service and capital requirements
through cash flows generated from debt financing and issuance of securities.
Our
working capital deficit at June 30, 2007 was $1,213,502.
We
used
$152,850 of net cash in operating activities for the six months ended June
30,
2007, as compared to $1,166,904 for the same period in 2006. This decrease
is
primarily attributable to the issuance of common stock for consulting services
and repayment of debt in the amount of $813,464 for the six months ended
June
30, 2007 compared to $307,351 for the same period in 2006. Net cash flows
used
in investing activities during the six months ended June 30, 2007 were
$62,684,
as compared to $6,730 during the corresponding period in 2006. This increase
of
$55,954 is primarily due to an increase in the purchase of property and
equipment.
Net
cash
flows provided by financing activities during the six months ended June
30, 2007
were $309,227, as compared to $1,359,488 during the same period in 2006.
This
decrease is primarily due to a net reduction in long-term debt of $34,722
during
the 2007 period compared with an increase in long-term debt of $1,088,270
in
2006.
Off-Balance
Sheet Arrangements
None.
Item
3. Controls
and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation,
under
the supervision and with the participation of our CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that the information
required to be disclosed by the Company in the reports that it files or
submits
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood
of
future events, and there can be no assurance that any design will succeed
in
achieving its stated goals under all potential future conditions, regardless
of
how remote. In addition, we reviewed our internal controls over financial
reporting and there have been no changes in our internal controls or in
other
factors in the last fiscal quarter that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
2.
Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3.
Defaults upon Senior Securities
None.
Item
4.
Submission of Matters to a Vote of Security Holders
None.
Item
5.
Other Information
There
were no matters required to be disclosed in a Current Report on Form 8-K
during
the fiscal quarter covered by this report that were not so
disclosed.
There
were no changes to the procedures by which security holders may recommend
nominees to the Company’s Board of Directors since the Company last disclosed
such procedures.
Item
6. Exhibits
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Rules
13a-14(a) and 15d-14(a) of the Exchange Act.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
INTERACT
HOLDINGS GROUP, INC.
|
|
|
|
August
16, 2007
|
By:
|
/s/
Jeffrey W. Flannery
|
|
Jeffrey
W. Flannery
|
|
Chief
Executive Officer, Chief Financial
Officer
|