Form 10QSB for MORGAN BEAUMONT INC
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14-Feb-2006
Quarterly Report
Item 2. Management's Discussion and Analysis or Plan of Operations.
As used in this report, the terms "we", "us", "our", "MBI", "Morgan Beaumont", and the "Company" mean Morgan Beaumont, Inc. unless otherwise indicated. All dollar amounts in this annual report are in U.S. dollars unless otherwise stated.
FORWARD-LOOKING STATEMENTS
The information in this Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements about Morgan Beaumont's capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the market price of natural resources, availability of funds, government regulations, common share prices, operating costs, capital costs and other factors. Forward-looking statements are made, without limitation, in relation to operating plans, property exploration and development, availability of funds and operating costs. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined herein, and, from time to time, in other reports Morgan Beaumont files with the SEC, including Morgan Beaumont's Annual Report on Form 10-KSB for the year ended September 30, 2005. These factors may cause Morgan Beaumont's actual results to differ materially from any forward-looking statement. Morgan Beaumont disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
Our primary products and services include: re-loadable financial products and prepaid phone cards for the sub-prime credit market as well as a network, branded the SIRE network for the processing of transactions related to our primary card products as well as other company's stored value products that we authorized to use the SIRE network. Since December 31, 2003, we have been providing these two cards to consumers in the sub-prime credit market. We began offering prepaid phone cards and telecommunications services in May of 2005.
Plan of Operations
In the fiscal quarter ended December 31, 2005, management's operational goals were to begin to develop direct relationships with retailers to the sub-prime market group and reduce dependence upon distributors in the space. This approach was possible because of demand for prepaid telecommunications products and our ability to develop prepaid phone products for this demand. Our strategy was to use the phone cards as a loss-leader to introduce our stored value products to the retailers.
We planned to complete the PCI certification process for the SIRE network during the quarter. This effort began with the hiring of James Christiansen as a consultant in January of 2005 and the establishment of our security and compliance committee. During the quarter we planned to implement the new security procedures and have an external review and certification of the SIRE network completed.
Our efforts to increase the number of POPS on the SIRE network were gaining momentum and we wanted to continue that effort to reach our goal of 100,000 POPS on the network. We planned to get the existing contracts in the implementation phase active and add further contracts.
We were working with our state licensing attorneys, Jones Day, to complete our review of licensing requirements throughout the United States and begin to file applications where necessary. We also planned to employ Jones Day to find the most efficient way to structure our business relationships and thereby minimize our licensing requirements.
We planned to expand our payroll programs under our active product Prestige Payroll to allow are sales and marketing personnel more flexibility when addressing customer needs. We also planned to complete the release of our new retail card
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ServiBancos, a product targeted to the Hispanic market that also facilitated our efforts to market economically to the retailers rather than use our distribution strategy. We planned to continue development on the SIRE Elite and Ultra Pay cards and add a non-reloadable gift card to expand our product line with new products to effectively address our markets.
We also continued to work on enhancing card function to increase value to the consumer and provide new potential revenue sources to us. Prior to the end of the quarter and in the quarter, we began working on and continued to develop credit reporting, bill pay and a dual purpose phone and stored value card to our products. We planned to continue adding new banks and processors to build redundancy and flexibility into our product line.
The goal for the quarter was to have revenue dramatically increased with telecommunications revenue by using our new retail channel and continuing to move more phone product through our distribution network as well as signing strategic wholesale contracts to provide telecommunications services. We did not plan to introduce the stored value cards into the retail channel until the second fiscal quarter to give our new representatives time to learn the stored value product and develop a relationship with our new customers. Our plan was to focus on payroll stored value cards until the new retail channel was ready for stored value cards.
Results of Operations
In June 1975, the Financial Accounting Standards Board, in its Statement No. 7, set forth guidelines for identifying an enterprise in the development stage and the standards of financial accounting and reporting applicable to such an enterprise. In the opinion of management, our activities from inception through December 31, 2005 fall within the referenced guidelines. Accordingly, we have reported our activities in accordance with the aforesaid Statement of Financial Accounting Standards No. 7.
Sales and Revenues - We have seven sources of sales and revenue: initiation fees, hosting and licensing fees, transaction fees, prepaid phone cards and wholesale telecommunication service as well as the sale of our Morgan Beaumont Stored Value MasterCard, monthly maintenance fees associated with keeping the card active and transaction fees. Revenue is also generated from the sale and use of prepaid telephone cards as well as through individual wholesale transactions of long distance communications service on our equipment. Revenues for the three months ended) December 31, 2005 and quarter ended December 31, 2004 were $1,489,749 and $41,200, respectively. Revenue in the quarter ended December 31, 2005 was composed of $800,604 in wholesale domestic and international telecommunications, $647,999 in prepaid calling cards, $31,085 in stored value cards and $10,061 in fees. In the quarter ended December 31, 2004, revenues arose from the initial shipments of our new card programs of $30,150 and transaction and fees of $11,050. Revenue in stored value cards and transaction fees were flat in year-to-year comparison and telecommunications revenue which did not exist in December 2004, caused the increase in revenue from quarter ended December 31, 2004.
Cost of Revenue - Total costs of revenue for the three months ended December 31, 2005 and December 31, 2004 were $1,835,484 and $17,734, respectively. Costs of revenue in the quarter ended December 31, 2005 included stored value card costs of $26,669, cost of fees of $5,000, telecommunications costs of $1,798,117 and inbound freight of $5,698. Cost of revenue for the quarter ended December 31, 2004 included stored value card costs of $12,058 and cost of fees of $5,676.
Gross Margin (Deficiency) - Gross margin in the quarters ended December 31, 2005 and 2004 was a negative $345,735 and a positive $23,466, respectively. The negative gross margin in 2005 was the result of reduced pricing for our phone cards in our effort to gain market share.
At December 31, 2005, we had approximately 32,750 POPS active on our branded SIRE network in the United States and approximately 66,000 additional POPS under contract and in various stages of implementation. During the quarter ended December 31, 2005, we contracted an implemented 22,000 POPS at MoneyGram. Throughout the remainder of fiscal year 2006, we intend to finish the implementation of the 66,000 POPS under contract and not active as well as continue to grow the number of POPS on the SIRE network.
Other Operating Expenses - Other operating expenses for the three months ended December, 2005 and 2004, were $2,054,829 and $1,612,477, respectively. Our activity in preparing additional products for release, adding and implanting POPS, certifying its network with MasterCard, as well as our increased sales were the primary causes of the increase in
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operating expenses. Additionally, the expense of the reporting process and in particular the attempts at registration of securities issued in the private sale of our stock caused increases in legal and accounting expenses. Other operating expenses included depreciation and stock based compensation (non-cash expenses) of approximately $93,000 and $752,000, respectively. Of these operating expenses we expensed as stock based compensation $739,817 in the quarter ended December 31, 2004 and recognized a credit of $2,532 in stock based compensation expense as a result of revaluation of consulting options under SFAS 123. Other employee compensation of $877,855 and $567,390 was recognized in the quarters ended December 31, 2005 and 2004, respectively. The increase was due to the addition of personnel to develop, market and account for our products. Other professional fees incurred in the quarters ended December 31, 2005 and 2004 were $596,474 and $208,339, respectively. The increase in other professional fees is primarily attributable to legal and accounting fees related to external reporting, completion of certain agreements and contracts and our efforts to register stock issued in private sales of our common stock. We will continue to upgrade our technology to maintain what we believe is its lead in technology within the market.
Net Losses - During the nine months ended December 31, 2005 and 2004, we sustained net losses of approximately $2,053,200 and $1,523,500, respectively. Operating results were hampered in the first fiscal quarter of 2005 because of the expenses related to the efforts keeping our telecommunications switches active during and in the aftermath of hurricane Wilma when it struck the Miami area delays in the release of new products and delays in the sales process as we redefined our approach to the market from a distributor based distribution model to a direct model.
Liquidity and Capital Resources
From inception to December 31, 2005, we generated cash from financing activities of $11,491,177. This amount arose primarily from sales of our common stock and collections under a note receivable from a stockholder that was acquired at the time of the Pan American merger discussed above. We have used a significant portion of this capital to fund cash outflows for operating and investing activities of $8,345,037 and $1,204,841, respectively, and as of December 31, 2005, we currently have cash on hand of approximately $1,941,000. Management believes this cash, will be sufficient to operate us as currently structured for the next twelve months if we meet our sales and operational targets. However, since we have not attained profitable operations and are dependent upon obtaining financing to pursue our plan of operations, there is no assurance that we will not require additional resources in the future or that it will be able to obtain financing in the amount required or terms satisfactory to us.
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