Form 10KSB for MODERN TECHNOLOGY CORP
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27-Oct-2006
Annual Report
Item 6. Management's Discussion and Analysis of Results of Operations.
General
The following information should be read in conjunction with the Consolidated Audited Financial Statements and Notes thereto and other information set forth in this report.
Forward-Looking Statements
Statements contained in this Form 10-K that are not historical fact are "forward looking statements". These statements can often be identified by the use of forward-looking terminology such as "estimate", "project", "believe", "expect", "may", "will", "should", "intends", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as statements relating to timing, costs and of the acquisition of, or investments in, existing business, the revenue or profitability levels of such businesses, and other matters contained in this Form 10-K regarding matters that are not historical facts, are only predictions.
No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-KSB. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.
Overview
We were incorporated in Nevada in 1982 as a for-profit corporation. We have never experienced any bankruptcy or similar proceeding. We have never by a party to a 'reverse merger' or similar transaction. We have engaged in business categorically similar to our present line of business since inception.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Our sources of revenue are primarily from:
† Consolidated revenues of our portfolio companies which we own in majority;
† Management and consulting fees we may charge our portfolio companies;
† Revenue sharing agreements we may have with our portfolio companies;
† Royalty and licensing proceeds from the sale of technology rights we may own in whole or in part with our portfolio companies;
† Proceeds from the sale of securities we may own in our portfolio companies;
† Proceeds from the interest and payment of debt we may hold in our portfolio companies; and
† Proceeds from the conversion of debt we may hold in our portfolio companies into marketable securities and subsequent sale of same.
In March 2004 and as part of our plan of reorganization and ongoing plan for operations we applied for listing of our Common Stock on the Over-The-Counter-Bulletin Board. We received approval on July 19th, 2004 and trade under the symbol MODC.
On July 31, 2004 as part of our plan of reorganization and ongoing plan for operations we affected a reverse split of the Company's common stock on a 1 for 15 basis. On May 15, 2006 we affected a reverse split of the Company's common stock on a 1 for 20 basis.
Results of Operations
During the fiscal year ended June 30, 2006 we generated revenues of $11,472,254 versus $3,078,145 for the fiscal year ended June 30, 2005. Gross margin for the fiscal year ended June 30, 2006 was $1,145,264 versus $816,933 for the fiscal year ended June 30, 2005. The increase in sales of $8,394,109 and gross margin of $328,331 during the year ended June 30, 2006, respectively, can be attributed mainly to the acquisition of INmarketing Group Inc. (IMG) on December 20, 2005. During the year ended June 30, 2006, the company's inventory was reduced by $1,323,417 as a result of obsolescence.
In comparing fiscal year expense items for fiscal year 2006 with fiscal year 2005 items, the Registrant experienced increases in both operating and nonoperating expenses primarily due to the acquisitions of Sound City and IMG. Sound City was acquired on January 24, 2005 and IMG was acquired on December 20, 2005. Therefore, the expenses for Sound City were included in the full fiscal year of 2006 whereas they were only included for approximately six months during fiscal 2005. The expenses for IMG were only included in fiscal 2006 for approximately six months versus zero for fiscal 2005.
Non-operating expenses (income)
The decrease in interest income during fiscal 2006 of $58,356 is the result of the sale of the Demarco convertible debenture. Since it is was sold during fiscal 2006, no interest income was recorded during fiscal 2006. The increase in interest expense of $193,865 is due mainly to higher debt levels during fiscal 2006 and noncash interest expense of approximately $44,000related to the warrants issued. The loss on the sale of the Demarco loan is due to the sale of our investment for a note receivable of $500,000 from Shield Investments. The goodwill impairment of $2,126,983 is the result of our analysis of our Sound City's business and cash flows and our conclusion that the goodwill was totally impaired, resulting in the complete write off of goodwill related to Sound City.
Preferred stock dividends deemed decreased by $132,802 during fiscal 2006 as our convertible debt issuances during fiscal 2006 were mainly not "in the money", resulting in much lower deemed dividends.
Preferred stock dividends in arrears increased by $53,170 during fiscal 2006 as our series A preferred stock was outstanding for the entire year.
During the fiscal years ended June 30, 2006 and 2005, we generated net losses of $6,543,342 and $1,123,816, respectively. The increase in net loss is attributable to the expenses associated with acquisitions and related costs.
Liquidity and Capital Resources
At June 30, 2005, the Registrant's total assets amounted to $6,861,170 as compared with $31,827 at June 30, 2004. The change can be attributable to the acquisition of Sound City and related operations. During the fiscal year ended June 30, 2005, we have experienced negative cash flows and have relied primarily on the Registrant's cash balances to fund our operations. We are not currently bound by any long or short-term agreements for the purchase or lease of capital expenditures.
Our ability to continue in existence is dependent on our having sufficient financial resources to cover operating expenses. We believe we have enough cash and equivalents to cover operations for the next twelve month period.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 2 of Notes to the Consolidated
Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are
required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of
operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, our Management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time.
Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, our Management believes that our consolidated financial statements are fairly stated in accordance with accounting principles
generally accepted in the United States (GAAP), and present a meaningful presentation of our financial condition and results of operations.
Our Management believes that the following are our critical accounting policies:
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws. Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.
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